Now that you've decided you want to go to college and have determined how much money you need to save up for tuition and fees, you might want to take a look at 529 College Savings Plans, which could help pay for college. The popularity of 529 plans has exploded in recent years, but not many people, especially students, are aware of how they work.
What is a 529 College Savings Plan?
To boil it down, a 529 savings plan is an education savings plan operated by your state that is specifically designed to set aside money for educational expenses, completely tax-free. While the notion of income tax can be foreign to high-school and college students, putting away large sums of money can accumulate a considerable amount of taxes you have to pay every year. That is, unless the money is invested into a savings plan that can mature tax-free.
Some state 529 plans even offer other benefits, such as matching grant and scholarship opportunities and exemption from state financial aid calculations. How cool is that?
Keep in mind that 529 Savings Plans can only be used for educational expenses like tuition and fees, books, supplies, and room and board.
Types of 529 Savings Plans
- 529 Prepaid Tuition Plans allow you to pre-pay education expenses in the form of credits that lock in today's tuition prices. Typically these plans only work for the cost of a public university, but they can go towards a private school if you make up the difference in tuition. Usually these plans do not allow you to use these units towards room and board.
- 529 Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. Your account will go up or down in value based on the performance of the particular option you select, however you can change your plan up to twice a year. These savings plans will cover all higher education expenses, and, unlike prepaid tuition plans, they allow you to enroll all year rather than having set enrollment periods.
Advantages of a 529 Plan for Tuition and Fees
While 529 Savings Plans can sound a little tricky, there are some enormous advantages, such as:
- The principle and the money earned in the plan are both exempt from state income tax.
- They can be gifted to you by your parents without a huge gift tax.
- They provide an easy way to save for college. The ongoing investment of your account is handled by the plan providers.
- They allow for substantial deposits and have no income or age limitations.
How to Start a 529 Savings Plan
When you put money into a 529 Savings Plan, you get to choose your investment options, which include stock mutual funds, bonds, money market funds or age-based portfolios that shift toward conservative (i.e. less risky) investments the closer you get to college. It is important to understand the fees and expenses associated with 529 Plans, because they lower your potential returns. Fees and expenses will vary based on the type of plan you get, so read the fine print carefully and weigh your options.
Prepaid tuition plans typically charge enrollment and administrative fees. College savings plans may charge enrollment fees, annual maintenance fees, and asset management fees. You can enroll in a 529 Plan directly with the state or through a financial advisor.