Saving for College: Using the 529 Savings Plan

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Children bring joy, smile, and a sense of hope to not only their families but friends and strangers. They are beautiful, infectious, joyful, and could also be very expensive to raise. According to babycenter.com the total expense to raise a child would run about $350,000 for a family living in the Northeast on a modest salary. This estimate could also increase if you choose to send your child to a non-state university. So it is imperative for parents to seek the available options that are out there in order to alleviate this rising cost. One very useful savings plan for future educational expenses is the 529 College Savings Plan.
The 529 Plan is a savings plan for future higher educational expenses that is operated by a state or an educational institution. There are two types of this plan; prepaid or savings. As Lauren Prince from Prince Financial Advisory, located at 275 Madison Avenue in New York City explains, “The pre-payment option allows you to lock in the current tuition rates and to avoid cost increases when your child wants to enroll at a participating state school.” Since we can all rest assure that tomorrow’s college rates will rise, you can understand why this might be an option. If you are worried about your child not attending a state school, Lauren says “There may be out-of-state schools that participate in the program or the money deposited into the program can be refunded with a set interest rate given as outlined in the 529 pre-payment plan program.” She warns, “It pays to read the program description carefully before enrolling in this type of plan.”
The other type of 529 plan is the Savings Plan, which is different in that it’s based on the growth of the market. Contributions are generally invested in mutual funds, and investment risk is typically dictated by the age of the child. If a child is in his/her early years, the investment portfolio will consist of more aggressive asset allocation than a child that is nearing college-age. There are also other risk-based asset allocation options that don’t take in to account the age of a child. Some other savings plan also offer a stable value or guaranteed options set out to protect an investor’s principal.
So what are the advantages of saving in a 529 plan? The main advantage of this savings plan is that the investment grows tax-deferred. In addition, when the time comes to pay for qualified educational expenses for the beneficiary, the withdrawals are tax free. Several states, including New York, also offer additional state tax benefits. There is also the advantage of control; the individual who opens the account is in full control of the investment. Funds can be withdrawn at anytime by the donor, however, if the withdrawals are not “qualified” it will be subject to income tax and an additional penalty of 10%. The savings plan is also very flexible with regards to the named beneficiary who could be changed. For example, for whatever reason a child may not attend college or may receive a full scholarship. The donor may choose to change the beneficiary name to another family member including him/herself. So this savings plan could be looked at a family savings plan for higher education as it is flexible as to whose expense it will cover and when one can make the withdrawal.
Opening up an account is very easy as both New York and New Jersey allow individuals to enroll in this account within minutes online. The investment management is also handled by private mutual fund companies for both New York and New Jersey. This means less time is required as the donor can simply choose the savings plan and sit back. However, Lauren advises “Some mutual fund families have better investment performance than others. It pays to look around yourself or to have a financial professional help you.”
If you have started saving for your child’s future educational expenses through a regular bank account, you can easily transfer the funds into a 529 account. Lauren explains “If a parent/guardian has a bank account set up in trust for a child, then the parent can take the money to open a 529 savings plan or pre-payment plan. If the bank account is not set up in trust for the child but is in the parent’s name only, the parent can set up a 529 plan for the child with this money.”
For more information on the saving for 529 plan in New York and New Jersey, please visit the links below.