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College Savings Plans

Welcome! If you’ve found your way here, you came looking for clarity and guidance in your college savings plan construction. Look no further – we can offer you the help you need, and the information you seek. We can give you an idea of the sort of college savings plan you may need using our very helpful college savings calculator. And most importantly, we can help you make college savings plans that work for you, your family, and your finances.

What is a 529 college savings plan?

If you’ve been researching college savings plans, then it is very likely you’ve heard mention of what’s called a 529 college savings plan. However, for the uninitiated, it may be difficult to understand just what a 529 college savings plan is, and more importantly, how it can benefit you as you seek to piece together a comprehensive college savings plan.

A 529 college savings plan is a funding and savings vehicle – geared toward helping with the cost of higher education – that has federal tax advantages. There are two types of 529 plans – college funding/savings plans and prepaid tuition plans. Though they enjoy the same tax advantages, there are still notable differences between the two.

Understanding 529 College Funding Plans or Savings Plans:

529 college savings plans allow you to save for your child’s college education in an individual investment account. State-run and operated, 529 college savings plans come with a trusted financial institution to help manage and maintain your plan. All you need do to open a 529 college savings account is fill out an application, name someone as the beneficiary, and begin contributing money to it.

Generally speaking, you choose one or more investment portfolios that are offered by the 529 college savings plan itself, whose underlying investments were selected and maintained by the plan's assigned money manager. After this, you simply decide when to contribute to your college savings plan, and how much you wish to give.

Most of these 529 college savings plans work with age-based portfolios. This means that the money is invested based on the age of the beneficiary. The younger the beneficiary, the more aggressive the investments will be. As the beneficiary gets older, the inverse becomes true, with the inherent risk of the investments decreasing as time goes on.

The aim of a 529 college savings plan is to yield as high returns as possible when your child’s college career is a considerable distance in the future, then to decrease the risk on those accumulated funds as the time to use them draws closer.

Understanding 529 Prepaid Tuition Plans:

Though a 529 prepaid tuition plan, much like a 529 college savings plan, allows you to save money for paying college expenses, it does so employing a different methodology.

They are either sponsored by the state – for public universities – or by individual private colleges and schools. Your 529 prepaid tuition plan simply saves tuition expenses paid in the present that can be used when the time comes to pay for school. All of the money contributed by you, and by the investments made by your 529 prepaid tuition plan, are pooled into a single, general fund.

The most common 529 prepaid tuition plan is what’s called a contract plan, in which you exchange cash paid up-front (through payments or investments) for an agreement to take care of an amount (previously agreed upon) of future tuition expenses at a particular college cited in the plan. These plans have separate criteria for figuring out how much they'll pay in the future. Should the beneficiary of the plan elect to go to college at an institution not supported by the plan, a predetermined formula is used to deduct from the overall benefit.

There are also unit plans, in which you purchase units that represent about 1% of a participating school’s average tuition cost. These units fluctuate according to annual tuition increases. You may also use these prepaid units (sometimes referred to as credits), for other costs associated with higher education (including books, living expenses, or other miscellaneous supplies).

The Advantages and Disadvantages of 529 College Savings Plans

As with any savings vehicle, there are inherent merits and flaws to consider.

Some of the biggest pros are the tax-deferred growth (both on federal and state levels), favorable federal gift and estate tax treatment, assorted state tax advantages, high contribution limits (beginning in the neighborhood of $250,000 and going upward from there) and general availability to the general public (regardless of income level or parental status).

However, some of the cons you may want to consider include the investment risk (and lack of flexibility with your investment), and the assorted fees (maintenance, administrative and investment, traditionally speaking), expenses (such as enrollment and administrative costs for prepaid tuition plans), and penalties on nonqualified withdrawals you may have to take on with a 529 college savings plan.

Overall, though, 529 college savings plans are a very popular, tried-and-true method for saving and funding for your child’s college education.

There are also life insurance and financial aid options to consider, though, as you look for ways to construct a well-rounded college savings plan. Take some time to read through the articles on our Web site. Also, feel free to reach out to us today for more information about all of the options you have for college savings planning (both in regards to 529 college savings plans and beyond), so we can help you down the road to completing and maintaining your ideal college savings plan.