Home Paying for College Financial Planning Is a 529 College Savings Plan for You?

Is a 529 College Savings Plan for You?

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One option that most parents choose when it comes to college savings plans is the 529. For those in the dark, this plan lets you invest a certain amount of money every year in stocks, bonds, mutual funds, and other investment options with the understanding that the money will be used to fund your child's education.

Perhaps the biggest deterrent to education is the lack of adequate money. To ensure that their children learn, parents must have earned and saved away hundreds of thousands of dollars and planned for their education right from their childhood. If not, you're at the mercy of loans that bloat up with interest, unless your kids are smart and savvy enough to qualify for aid. However, many parents with a steady income prefer to be prepared and set aside an amount every year rather than have to deal with the costs all at once when their child is ready to start college. And with tuition costs rising every year, it pays to have the foresight to get ready today for a day that is bound to arrive ten or more years later.

The 529 may be the way to go becasue it comes with a host of advantages:

  • You're eligible for tax deductions on the amount you invest and on the interest if you choose a plan from your home state.
  • You can invest in the plans of other states if you're not satisfied with the options in your own state.
  • You don't have to manage your money and your portfolio; you're paying other people to take care of these aspects for you.
  • You can rest assured that your child's college expenses are taken care of.
  • The money can be transferred across states and used at any college in the country and even in some abroad.
  • There is no cap on the amount of money you can invest every year.

 

However, in spite of all these benefits, the 529 is viable only if:

  • You're sure that your child will choose to go to college since the money cannot be used for anything other than education. If your child decides not to go to college, you will have to pay federal and state tax on the amount you've saved and the interest you've earned over the years.
  • You have a steady income that lets you put away an amount every month without eating into your other expenditures.
  • You gain tax benefits on the amount you invest and the interest gained. If you choose to invest in another state's plan, you may lose this benefit.
  • You're ok with someone else handling your investments. If they make a bad decision, you lose your money for good.
  • You don't mind paying the high fees that these plans involve; 529 options are certainly not cheap.
  • You're aware that any unused money will be taxable after your child finishes college, unless he or she is willing to do another degree.
  • You don't mind that your child could be at a disadvantage when it comes to applying for and receiving student aid and scholarships.

A suitable alternative to the 529 is the Coverdell plan which allows you to set aside money that you can use for primary and secondary education as well. However, you can invest only $2000 every year, so if you want to put in more money, a 529 is the way to go.

Some parents choose both Coverdell and 529 plans for the same child. This way, they're boosting the security option of these plans and ensuring that their child will have enough money to afford the education of their choice.

This guest post is contributed by Carrie Oakley, who writes on the topic of online college . Carrie welcomes your comments at her email id: carrie.oakley1983(AT)gmail(DOT)com.

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