A 529 plan can help you save money for a college education.
A 529 savings plan is a plan administered by your state, colleges, certain state agencies or a university to assist you in setting aside money to prepare for your family's future educational needs. You can use money from the 529 college savings plan as an adult or for your designated beneficiary, while a 529 prepaid tuition plan is reserved for children.
Types
There are two types, or categories or 529 plans -- either a savings plan or a prepaid plan. A savings plan gives you control over how and where you invest your money, depending on your risk profile and personal preferences. A prepaid plan enables you to set aside enough money to cover either the entire amount or a percentage of the costs of a public college or university in your state. You can convert the 529 prepaid plan to use it at either a private university or a university in another state, if desired. If you think your child may want to attend a private university, choose an Independent 529 plan.
Benefits of Beginning Early
If you have a young child or grandchild, the best time to start saving for his college is before he enters elementary school. In the case of a college savings plan, the farther away your child is from beginning his college education, the more time your money has to grow. Beginning a prepaid tuition plan early in your child's life generally means lower payments for a shorter period of time, as opposed to starting a plan closer to the time you child enters college.
Why Enroll
Although you can save for your child's college education on your own, you will enjoy special tax benefits by participating in a 529 plan, according to the U.S. Securities and Exchange Commission. Unlike many other earnings on your investments, you do not have to pay federal taxes on the money you earn by investing in a 529 plan, provided you use the money for qualified expenses. The exception is if you withdraw from the plan and use the money for purposes other than college expenses. At that point, you may be liable for not only federal and state taxes, but also a penalty.
Considerations
The rising costs of college tuition make the need for investing in a 529 plan easy to quantify. If you use taxable dollars to pay for a college education or rely mainly on loans to finance a college education, you are paying more money than you would have if you had invested in a 529 plan. Examine the fees and associated expenses with any plan you consider. Also consider the portability from one state or institution if you move or your child decides to attend a college in another state. Be aware that there are contribution limits to the plans. You are generally not allowed to contribute more than the cost of education expenses.
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