Monday, May 4, 2009

Save For Your Child's Education - Part 4


Tip #131 - Save For Your Child’s Education – Part 4. Today we will discuss the 529 Savings Plan in detail. The government allows virtually unlimited contributions into a 529 plan to be used for qualified expenses related to college or vocational school. You can use it for books, school fees, or room and board, as well as tuition. 529 plans are offered through most of the 50 states. The money you invest in these plans is managed by the company the state has selected to oversee the accounts. In general, most states have selected a mutual fund company, such as Fidelity or Vanguard to oversee their 529 plans. They usually have different plans you can choose from depending on when you expect your child to enter college. So there might be a 2020-2022 plan and a 2023-2025 plan, for example. The first would be a plan for a child who is entering college in the year 2020 to 2022, while the second is for a child who is entering college in the year 2023-2025. Generally, the further away from college the child is, the more aggressive or risky the investments in the plan suited for them are. You are not bound to their suggestions, though, and can invest in any plan they offer.

Like the (ESA), the contributions are not tax-deductible, but the earnings grow tax free in these accounts as long as you use this money to cover qualified education expenses. There may be financial benefits, however, if you invest in a 529 plan from your state. Contributions might be deductible from state income taxes; you might get matching funds, or money in the plan might not qualify against your child for financial aid. Also similar to the ESA, you can transfer unused money to another beneficiary in the family. And better than the ESA which has age limits of 30, there is no age limit on when the money has to be used by. Also, there are no income limitations on who can invest in a 529 savings plan.

There are some cons to the 529 plans as a savings vehicle for education. Unlike the Education Savings Account, you cannot use it for primary or secondary education. It is only for college or vocational school. Also, there are an overwhelming number of choices of which state’s 529 plan to invest in. It can be confusing – first deciding which state’s plan to choose and then within each state, which investment to choose. Some plans have higher fees associated with it than others, but some might have better investment choices. And then there are the benefits your own state’s 529 plan may offer to you. So the choices can become staggaring. Also, once you choose your investments, you are bound to that investment with only once change allowed per year to move the money around. Lastly, you are giving up some control of your money by having the managers of the 529 plan control the investments you choose.

In general, the 529 plans are an attractive vehicle to start your child’s education fund. The amount is unlimited, the tax-free growth is attractive, and there are no income restrictions. If you want to investigate 529 plans further, there are several websites out there that give details of the different state’s plans that are available. Be mindful that some are sponsored by different companies and might not be impartial. Here are a few sites: Saving For College (sponsored by Bankrate), College Savings, and one from Money Magazine that is a few years old, Money's Comparison of State's 529 plans.

In Real Life (IRL) –
I mentioned earlier in this series that we don’t invest in a 529 plan yet. Since we can only afford to put away $2000 per year per child toward their education, I prefer the ESA, where I can manage how their money is invested. We hope to put more money away each year once I go back to work, though, and at that point I will probably start investigating the 529 plans more carefully (or if the limits go back down to $500 for the ESAs next year). Since I live in Virginia, I would pay careful attention to their plan first since there are tax incentives to invest in The Old Dominion’s plan as a resident of that state.

At this point, though with the stock performance what it has been, I am not sorry that I’ve been more conservative in our investments for college. While I hear many others bellyaching about how lousy their 529 plans are doing, I’ve been quite pleased with the 4-5% growth on mine. Overall, I don’t think 18 years is that long of a timeline to be fully invested in stocks for college, but I seem to be in the minority in that thinking because as I said, I tend to more conservative than others are in terms of investing. I also prefer to have control of my investments. But as I mentioned earlier I will consider the 529 Plan when we are putting more money away for college than the ESA allows.

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