What is a 529 Savings Plan?

What is a 529 Savings Plan?

What is a 529 Savings Plan? |brokeGIRLrich

College these days is ridiculously expensive. I’ve ranted about it a few times. However, the goal of today’s post is not to rant, but to overcome. As much as I wanted my angry keystrokes to take down the system, the fact remains that college is still necessary for most. So what’s a parent (or a kid) to do?

My research has brought me to this first bit of advice – when the stick turns red, the second line does appear or turns into a plus sign – open a 529 account. And then tell your significant other that you’re expecting.

529 plans are usually run by the state and pretty much every state has them. However, you’re not tied to using the plan of your home state or the plan in the state where the college your child will attend resides – which is good, because your fetus probably hasn’t decided where it wants to go to college yet, much less whether it’s county college or Harvard material (I’m sure it’s Harvard. You go, genius fetus!). This will take a little research on your part to find which plan has the best benefits for you.

There are two types of 529 plans. One type acts like a savings account, similar to a 401(k) or IRA. You will choose from a selection of investment options and your money grows in that investment with several tax benefits when it comes time to use the investment. While your contributions initially incur no tax breaks, the withdrawals are federal tax free. Many times, if you choose a 529 plan in your home state, you can receive benefits from them as well.

Prepaid plans are the other type of 529 plans; however, they often require some level of commitment to which school your child will attend. In this plan, the cost of schooling is set and you start to pay for it at that amount, so by the time your child goes to school, the tuition is (at least in part) already paid. There are three types of these prepaid plans:

1.)   Contract Plans – these cover semesters or years at qualified two or four year colleges.

2.)   Unit Plans – This unit lets you buy a “unit” of school costs (for example 1% of school costs = X number dollars) and you decide how many units you want to purchase.

3.)   Voucher Plans – You select a specific percentage of tuition at specific schools (for example you would purchase coverage for 25% of the tuition, that you could then save up for and you would only have to worry about paying 75% of the tuition when your child goes to school).

There are 21 prepaid college plans in existence (20 are actually 529 plans, one in Massachusetts is an independent plan that is not federally regulated, but has many of the same benefits). Only 15 still accept applicants and 11 of these have residency requirements.

With prepaid 529 plans, it helps to approach it with an insurance mindset. You will be offered “in-network” and “out of network” colleges, so be sure to take that into account. You will be narrowing the schools your child can attend by investing in a 529 plan, if you want to get the full benefit of the plan.

They grow so fast... but not as fast as tuition rates.

They grow so fast… but not as fast as tuition rates.

So, you’ve decided to go with the 529 plan and Junior up and joined the military or you lost your job and you’re all about to be evicted to a cardboard box under an overpass and you really need that money back. Pronto. Well that money is still yours. In most cases, you can withdraw it whenever you’d like with a 10% penalty tax and you will need to pay taxes on any gains. Not awesome, but not the worst thing in the world.

You can change the investment structure of the plan once a year and roll it over into a different plan once every 12 months. You can also add or change the account beneficiaries, so if Junior does become a Marine, little Sally can reap part of that benefit too and use what you’d saved for him. Also, if Sally turns out to be a soccer superstar, you’ll still have to pay taxes on the earnings, but you can withdraw the amount of scholarship without paying the 10% penalty tax.

Coincidentally, turns out there’s a cool Etsy shop where you can order infant caps and gowns (ie. the first picture in this post). I’m not really sure what their function is, but they are adorable… so, if you ever need an infant cap and gown, check out AleneCutlerCreations.

So brokeGIRLrich readers, are any of you using a 529 to pay for your kid’s college education? What influenced your decision when picking the state to base it out of?

 

And don’t forget to enter for a chance to win Debt-Free U, a great guide full of tips and tricks to make your way through college debt free. Contest ends on 1/31.

a Rafflecopter giveaway

*Part of Financially Savvy Saturdays on Femme Frugality and Rather-Be-Shopping.com*

15 thoughts on “What is a 529 Savings Plan?

    • It looks like that’s a pretty good variety of them, from my research it seems that the primary reason to go with your own state would be that the tax benefits are pretty much the best that way – but if it ties you to too few schools or investment options, not really worth it.

  1. We have a 529 plan for all three of our teens. We have auto deposit into them each month. It’s not as much as I would want, but it’s something. We also get a tax break for it.

  2. I am really glad the system is so different in Australia and this is not something we have to worry about as much. I am still going to save some for my daughters education, but here you get an interest free loan, that you don’t actually have to pay unless you earn over a certain amount. You can pause the payments if you go off to have a family etc. While it is still a loan, it does not put the pressure on families like your student loans.

    If my daughters want to go to university, I am happy to contribute but I want to encourage my children to pay their own way in life and not rely on me.
    Kylie Ofiu recently posted…House deposit saving plan – $70,000+ needed in 9 monthsMy Profile

  3. I love it! I have used the 529 in the past and it truly works. I’ve even used it for my own continuing education classes. And, thank you for stopping by Shine a Spotlight Saturday and sharing! See you next Saturday! —Deb at DialMforMoms.com
    Deb recently posted…Shine a Spotlight Saturday #1My Profile

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge