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Obtaining a college education is so important today, but sometimes it seems like it is very difficult to figure out how to pay for it. Whether you are saving for your son, daughter, niece, nephew or grandchild, it can be a challenge. As you see every day, the cost of things keep going up, and it should be no surprise that the cost of a college education continues to rise as well. For many, next to saving for your home, your biggest financial challenge may be saving for your child's college education.
How do you know how much to save? How much will a college education cost? What if you save all of this money and then your child decides not to go to college? The answers to these questions depend on how and where you've kept the money. Luckily, today there are several flexible ways to save for future college tuition costs, including opening what is referred to as a 529 college savings plan.
A 529 college savings plan is a very simple way to save
money for your child’s (or another family member’s) college education. The
benefits are tremendous.
Here are some of the best reasons to open a 529 account:
What is a 529 Plan?
The 529 Plan (named for Section 529 of the IRS tax code) is a savings plan for college education.
A 529 plan is a state-sponsored investment program. That is, the state sets up the plan with an asset or investment management company of its choice, and you open a 529 account with that asset management/investment company according to the state's plan features. You're the owner of the account, and the child for whom the account is set up is the beneficiary. You won't deal directly with the state, but rather with the asset management/investment company. Like any other investment, a 529 account is subject to market risk – the state doesn't guarantee your money. (Even though each state has an asset management/investment company it has partnered with, you are not required to use the company that is partnered with the state you live in).
Because each state can control some of the features of its own plan, there are variations from state to state. Also, some states offer multiple plans which can differ from each other, so make sure to compare those too.
There are no residency requirements on 529 plans. You can invest in any state's plan, whether you live there or not, and you can draw funds from the plan to pay for college in any state, whether it's in your home state, the plan's home state, or some other state.
Websites such as CollegeSavings.org or SavingforCollege.com offer comprehensive comparison tools that let you see which plans are available in which state, and compare their features.
The Benefit of No Federal Taxes
All of a 529 account's earnings/interest are exempt from federal taxes when they're withdrawn if they are used for qualified education expenses. This means that, unlike the taxes you have to pay on earnings/interest from regular investments, you won't pay any taxes on 529 account earnings unless you end up using the money for something other than higher education.
One of the nice things about a 529 plan is that qualified education expenses include room and board, fees, books and even computers.
You Control the Account
Unlike other types of accounts, the beneficiary doesn't gain control of the money at a specific age. The account owner always has control of the money. You don't have to worry that your child will grow up and spend the money poorly.
There are no restrictions on who you can open an account for. You can open an account for your child, a friend's child, a relative, or even yourself. 529 plans have no age restrictions either, so an adult could open an account to pay for some classes next year.
If it turns out that the beneficiary will not be using the money in the 529 plan, there's a lot of flexibility in how you can ultimately use the money. You can change the beneficiary, or you can withdraw the money for non-education purposes. If you do withdraw the money for a non-educational purpose, you will have to pay the tax on the earnings, plus a 10 percent federal tax penalty.
Selecting the Right Plan
Choosing the right 529 plan is no harder than choosing anything else in the financial world. If you do your research, you can find the right plan for your family. Here are few guidelines to get you started:
To gain more understanding or to enroll in a 529 Plan, you can reach out to a local financial advisor, your bank, or review information on the following websites: CollegeSavings.org or SavingforCollege.com.
Article sourced through SageView Advisory Group www.sageviewadvisory.com