If you tried to make the argument against using a 529 savings plan for college, you would be in a losing position. I know because I’ve been there… For a long time, I didn’t like the idea of saving for college because I believed the value of a college education was far less than what it cost. I still believe that to be true, but the flexibility of the 529 plan will still win the argument.
However, the available investments within a 529 plan are usually limited to mutual funds. As a result, it’s VERY important to thoroughly research the funds your plan owns. Use the resources from www.FreeInvestmentAudit.com to determine what the funds cost, what they own, and how much risk is on the table. This is especially important when the Stock Market is at all-time highs like it is today.
There are two types of 529 plans.
1 – Prepaid tuition 529 plan. These plans are currently available in 11 states. Basically, you purchase tuition credits at today’s price, then the plan pays the current price in the future when the beneficiary uses it. If you are 100% sure your kids will go to college, then this option is a really good one based on the rise in tuition we have seen over the last 20 years. It sure out-paces any investments you could hope for… However, it’s far less flexible than the traditional plan and like any investment, could lose money if tuition rates go down.
2 – College savings 529 plan. With the savings plan, your account value is based on the performance of the investments you have within the account. It acts very similar to an IRA. Most savings plans will have a money market or CD option so you can reduce risk as the beneficiary gets closer to the age they will be using the funds. This is by far the most common type of 529 plan.
529 plans are typically attractive to investors because of all the benefits:
– You pay no federal taxes on the accounts earnings and there are sometimes tax benefits as well.
– The custodian, YOU, maintain control of the account vs. a UTMA where the minor gets control when they turn 18.
– If the designated beneficiary doesn’t want to go to college, you can roll the account over to a different child or another family member.
– Anyone can contribute to the account.
– There are no income limitations that make you ineligible for a 529 plan.
– Most states do not have an age limit for when the money has to be used.
If you want to discuss a 529 plan, contact Dan Osgood, my Financial Planner in San Diego and author at www.FreeInvestmentAudit.com
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