Saving up for college using a 529 plan

Being an average student is like living through a depression nowadays. Students have to simultaneously pay off loan debts and reduce expenses. Most families can’t afford to pay tuition out of their pocket and resort to taking loans. For most millennials, this will be a huge challenge. Luckily, parents can help their children by investing in their education early.

What are 529 plans

The government noticed a rapid rise in college costs and decided to cast a lifeline to families. In 1996, state governments implemented a way for parents to set aside college money for their children. 529 plans can be used out of state and can be used to meet costs on most qualified colleges— you can be a NY resident and invest in a VT 529 plan. We can help you find out if the institution is eligible for a 529 plan. Almost every state offers a 529, so it’s important to research and compare state plans. These plans are usually categorized as either prepaid or savings plans.

Types of 529 plans

  1. Prepaid Plans let you prepay all or parts of the costs for an in-state education. These can also be converted for use at private or out-of-state institutions.
  2. Savings Plans work like a 401K or IRA by investing into a mutual fund or a similar investment. You will have several options to choose from, and your account will go up or down in value based on the performance of the investment you chose. You can get the information on how these plans perform online or by contacting us.

Benefits of a 529 Plan

529 plans are a smart investment for families cutting down on college debts. When withdrawing money, savings vehicles, like mutual funds, give up a portion of the earnings to annual income taxes and additional taxes. 529 plans are not deductible and will not be taxed when you withdraw saved money to pay for college. Additionally, most states offer a full or partial tax deduction or credit on 529 plan contributions.

In addition, you have full control of the account. The beneficiary has no legal rights to the account so you can make sure the money is being used the way you intend it. A 529 plan also takes very little effort to maintain; you can contact a financial advisor to help you with it. It does not need to be reported on your federal tax return forms, nor does it need to be constantly maintained legally. The most important thing is knowing that EVERYONE is eligible for a 529 plan.

Which 529 option is best for me

An important question to ask is whether you will invest directly into your 529 or through a financial advisor. Direct-sold 529 plans have a do-it-yourself approach, and while adviser-sold 529 plans are simpler, financial advisors do take a small cut.

  • Broker-sold 529s have higher annual costs and include sale charges anywhere from 1-5% of your contributions. Thus, when using a direct-sold 529 plan, you won’t have to give away several percent to sale charges.
  • Certain states offer special direct plans and give incentives to take them. Being a resident of the state opens up a multitude of options ranging from state income-tax deductions to a financial aid boost.

The largest expense is giving up the time and effort to research and find the best path and getting comfortable with the different tax rules and other investments. Because of this, many people prefer having a financial adviser make the decisions for them. Adviser-sold 529 plans have benefits such as:

  • A financial adviser can offer advice that extends beyond college planning. Good financial advisers can see the big picture and analyze your other investments to find the best option for you.
  • Financial advisers can invest in certain mutual funds that are otherwise inaccessible to you.

Even if you believe you’re capable of doing all the legwork yourself, sometimes it is better to save that time and invest it in other ways. Financial help can definitely be worth your money and at Plan Kids Future, we have dedicated financial advisers to guide you along the way.

Comparing 529 plans

Whether or not you choose to use a financial adviser, you still need to do some research. Start with researching your home state’s 529 plan. Some states offer tax-reduction for investing in your home state, while other states have rules that tax you when you make withdrawals from an out of state plan. Identify some must-haves for you. This might include options like:

  1. Any family member can make contributions.
  2. Have a minimum contribution level that you can meet.

With any investment, risk is involved. It’s important to choose an investment with a risk-level that you’re willing to take. You should be confident in the ability of your financial manager, and you should be able to label yourself as someone who is a conservative or an aggressive investor.

After you do this, you should ask your financial adviser or do some research yourself regarding the different plans available. Keep in mind that past records don’t predict future results. If certain states have a good history of investments, it doesn’t mean that it will continue this way; markets are subject to change. Finally, identify important differences like online access or customer service. Compare each plan side-by-side and find a plan that’s suitable for you.

At Plan Kids Future we can help you start planning years ahead of the game. We want you to make the wisest decisions and not delay investing in your child’s education.