An Introduction to 529 Plans
Whether your child is 15 months or 15 years old—now is the time to begin developing
a savings strategy for college. Higher education may seem an expensive luxury, but
it is also incontrovertibly a necessity. The workplace has become increasingly competitive
and even entry level positions can be difficult to secure without a diploma. Fortunately,
the federal government identified this dilemma faced by millions of parents throughout
the U.S. and authorized the creation of a program designed to ease the burden of
paying for college by helping parents get a head start. 529 tuitions savings plans
were the result of the government’s collaborative effort to promote higher education
by simplifying the process of creating a college fund and maximizing its efficiency.
An Overview of 529 Benefits
These plans are named after section
529 of the Internal Revenue Code and they are designed to help parents begin saving
for college by providing investment option that allows them to withdraw funds for
qualified educational expenses, tax free. The investment strategies, tax benefits,
and incentives offered by 529 plans vary by state so it is important to consider
the advantages of your own state as well as others. Some plans allow you to contribute
as little as $5 a month so everyone can afford to push at least a small amount of
their mad money—without excuse—into one of these investment plans. Tax deferred
growth on deposits, protection from bankruptcy, and the ability to use funds at
almost any college in the U.S. as well as hundreds of other institutions abroad,
are some of the benefits of the 529 option.
Costs Worth Considering
State sponsored 529 plans can be a great
option for parents who are looking for somewhere besides their sock drawer to stuff
their extra cash, but they aren’t flawless. Every 529 plan is different and some
are in fact better than others. The federal government has outlined the fundamental
qualities of an approved plan, but the nitty gritty details—the details that impact
your pocket book—are left to be determined by individual states and the sponsors
of each plan. Because of the differences between the plans, it is wise to review
as many as possible before determining which plan is best for you. In some states
residency determines eligibility and the ease of access to the benefits received
by the plans, while others allow enrollment to cross state lines. There are often
additional fees and tax penalties for participants who choose a plan outside of
their state that could offset any benefits afforded by that particular plan, as
such, it is critical that these penalties be drawn into light and thoroughly examined.
One notable disadvantage to the 529 program (which ironically is also one of its
benefits), is that the funds allocated into a 529 tuition savings account are set
aside for the sole purpose of paying for qualified higher education expenses. This
is a great benefit for those parents who have faithful, fail proof children equipped
with a 100% satisfaction guarantee; but, for those parents with less than perfect
kids—kids who don’t always follow the plans laid out for them—the benefits of 529
savings are annihilated by tax penalties when the funds are not used for educational
expenses. There is little way to get around this issue, unless of course, you are
yourself a child of the tough love movement and opt to have little 5 year old Sam
sign an affidavit that guarantees his future attendance at a specified 4-year university...or
else.
When you are considering a 529 plan, beware of fees. Estimated underlying fund expenses,
state fees, program manager fees, miscellaneous fees, annual distribution fees,
total annual asset based fees, and account maintenance costs are all associated
with 529 accounts. Fees, like benefits and incentives vary by state, so weigh your
options carefully.