With the cost of higher education skyrocketing, it’s wise to start saving early.
A 529 plan—named after its place in the IRS code–may be the perfect place to start.
But first it’s important to note the benefits, pitfalls and costs associated with them.
There are two types of 529s:
- Prepaid Tuition Plans
*Offered by specific in-state, public colleges
*Locks in future tuition cost
*Room and board expenses not typically included
*Usually guaranteed by state
*State residency by owner or beneficiary usually required
*Has mandatory age requirement for beneficiary
*Transferable at any time to new beneficiary
- College Savings Plans
*Covers all fees: tuition, room & board, mandatory fees, books & computers
*NO guarantee. Your investment is subject to market changes
*No age limit; open to children and adults
*No residency requirement
*Usually has contribution limits
Each state offers its own 529 plan, with different fees and investment options. You choose to participate in whichever plan you want—regardless of the state you live in.
Some colleges and universities offer their own plans too.
And most plans are remarkably easy to manage. Enroll, link automatic deductions to your bank account, ‘and forget it’ until college rolls around.
The tax benefits of 529s are also significant. None of the contributions get reported on your federal tax return, with some states offering additional tax breaks.
But 529 plans aren’t free. They usually cost more than mutual funds and include maintenance fees. These costs may or may not outweigh the tax benefits.
And cashing out for anything other than a qualified education benefit will cost you.
For instance, if after years of saving, your child decides not to attend college, you’ll be charged a 10% penalty as soon as you take any money out. And income taxes will be assessed.
The fee will be waived only if your student earns a scholarship. Remaining funds can be: deferred for that child’s graduate school, transferable to other children or future grandchildren, or used for college costs not covered by the scholarship (room, board, textbooks).
529 plans also affect the federal and private financial aid package that your student may be offered with each of his college acceptances.
For example, if you’ve been saving for your child’s college through a pre-paid tuition plan, but now he wants to attend a private university instead, the amount of financial aid he may be offered may be significantly reduced.
The impact on financial aid will depend on several factors: who the beneficiary is (you or the student), and on each university’s own policy. It’s vital to ask specific institutions about their financial aid policies in relation to 529 plans.
529 plans are particularly appealing to grandparents. That’s because they can retain control of the funds until college time. And they can be sure their gift will be used for its intended purpose. Still, tax issues arise and should be carefully considered before committing to any plan.
Tuition has been surging, and a student loan debt crisis is looming. At Silverman Financial, we are trained to help families save for their children’s futures. We offer comprehensive complimentary consultations to evaluate specific needs and goals.