I received a birthday invite that read: Please no gifts, money for college is much appreciated. This was for my friend’s daughter’s 2nd birthday party. Usually I’m rubbed the wrong way with gifting specifics but in this case I was quite proud of my friend’s preparedness. I know many people who are going through the horrors of paying for college (myself included) and we all say the same thing; “If only our parents left us a nest egg” this is followed by a prolonged sigh.
Having a college savings plan is paramount not only for the child but also for the parent because ultimately, both parties should not be burdened by the financial stress college can bring. A 529 College Savings Account is an excellent option for the fiscally wary parent. There are many beneficial reasons to opening one, beyond securing a future for the college student in your family.
A 529 college savings plan provides tax benefits in order to encourage savings for future college costs. They are sponsored by states, state agencies, and educational institutions and come in 2 types: prepaid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of plan. Many groups of private colleges and universities sponsor pre-paid tuition. Prepaid tuition allows college savers to purchase units or credits at collaborating colleges and universities for tuition, and in some instances, room and board. The majority of prepaid plans is sponsored by state governments and has residency requirements for either the owner or beneficiary.
Most plans set an amount and installment payments prior to purchase based on the age of the beneficiary and the amount of years of college tuition purchased. College saving plans have no lock on college costs but it does however, cover all college expenses including, tuition, room and board, mandatory fees, books, and computers (if needed). There are no age limits and are open to adults, much to the delight of people interested in returning to school and furthering their education. There are no residency requirements and enrollment in plan is open year round.
The 529 plan has many federal tax benefits. Despite your contributions are not deductible on your federal tax return, your investment grows tax-deferred and dispersal to pay for the student’s college costs come out federally tax-free. The tax-free benefit was made immutable with the Pension Protection Program Act in 2006. There are also state tax benefits that may offer some breaks as well, such as an upfront deduction for your contributions or income. Researching what benefits your state offers is a good start in 529 planning.
For the parent who is concerned with the rights and control of the account (because no one wants their kid blowing their hard earned investments) they will be satisfied to know that the donor retains control of funds. The donor decides when withdrawals are made and for what purposes. Most accounts allow you to collect your funds at any time for whatever reason, no questions asked. Compared to other types of custodial accounts under the Uniform Transfers to Minor Acts, the 529 plan allows your more control in the management of your investment.
The 529 plan is simple and flexible without much supervision on the donor’s behalf. Once you decide on which plan best suits you, you can complete a simple enrollment form and make your contribution or sign up for automatic deposits. The continued investment of your account is then managed by the state treasurer’s office or by an outside investment company hired to oversee the program.
There also is not a multitude of paper work to rifle through. You will not receive a 1099 form to report taxable or nontaxable earnings until the year you withdrawals. 529’s allow you to move your investments around to other programs or rolling over your account to a different state’s program every 12 months. Also, there is no federal limit on the constancy of these changes if you replace the beneficiary of the account with another family member.
Comparing the varying features of different 529 plans allows you to create an account that contains the flexibility you desire. Substantial deposits are allowed, up to $300,000 per beneficiary in some states. There are no income limitations or age restrictions, allowing the plan to be accessible for many people without the constraint of age or time.
With the rules of financial aid constantly shifting, it is important to learn how schools are adjusting to families with 529 accounts. This does not mean that your child will not qualify for need-based scholarships or aid, but by learning and calculating the financial changes beforehand you have a greater idea on how to design an individual plan for the beneficiary.
For an ever-changing economy and with tuition costs constantly spiking it is becoming an essential task to research all avenues in financing college. A 529 plan has a multitude of benefits for families planning on bright collegiate futures for their children and also for those returning to finish or begin new academic chapters in their lives. Part of me feels like sending out invites for my own birthday party with a note attached: Please no gifts, contributions for grad school accepted.