INVESTINGCOLLEGE

What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan for future education costs that is sponsored by state governments. It is an investment plan often used by parents for their children, to set aside money that can later be used for costs like tuition, room and board, and school supplies. These plans are often used by parents for their children, but they can also be used by an individual for themselves. They may also be opened by grandparents and other relatives.

One person can have multiple 529s dedicated to them or receive multiple outside contributions to their single account. It is important to be aware that having a 529 plan does affect the individuals financial aid eligibility in the future. Also, like most investment plans, there are typically penalties for early withdrawals.

Education Savings vs Prepaid Tuition

There are two main types of 529 plans: education savings and prepaid tuition plans. Choosing a plan and a provider can depend a lot on what your personal preferences and plans for the funds are.

Education savings plans are open to anyone. Each beneficiary can receive a maximum contribution of $10,000 each year. These plans aren’t solely for four-year colleges or trade schools, as they can be used for study abroad if allowed. You can choose among a range of investment options like mutual funds or ETF investments.

The second type of 529 plan is a prepaid tuition plan. This type is less common, as it is often sponsored by specific colleges, leaving less flexibility for college choices. The main benefit of this investment is that you can pay current tuition prices for future education. Prepaid tuition plans typically are tied to present investment types, leaving you less flexibility in terms of choosing where your money is going. Your contribution limit is going to depend on the current cost of in state public colleges and your plan provider.

Why should I have a 529 plan?

Depending on the investment option and 529 plan you select, you may have to pay annual account management fees so make sure to see what costs you might have. There is always the option to invest your money on your own, but you could get an FDIC insured 529 plan to invest stress free and eliminate some of the research and upkeep. Often when people think of investing, they imagine setting aside large amounts of money. If that doesn’t work for you, don’t let it dissuade you from using resources like a 529 plan. You can make automatic smaller deductions from your paycheck, or just set aside any spare money. Cost is the most common barrier to attending university, so planning ahead for yourself or a loved one can make a significant difference in future opportunities.

Sources:

https://investor.vanguard.com/investor-resources-education/article/things-that-may-surprise-you-about-529s#:~:text=If%20you%20have%20plans%20to,used%20for%20student%20loan%20repayment.

https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans