529 Savings Plans - A Highly Effective Way To Save For College

Today, college education is costly. Statistics show that costs have risen faster than the rate of inflation over the last 3 years. Going to college can often be a matter of privilege for low income families. However, there may be a way out for people who want to gain a university degree without gaining massive debt in the process.


529 college savings plan accounts are an effective way for families to prepare for a college education.
Parents or guardians can get a prepaid college tuition plan for their children in an affordable manner without paying capital gains taxes. You can choose from a 529 Prepaid Tuition Plan or another type which is known as the 529 Qualified Tuition Plan.

However, what is advantageous about the 529 plan College Savings Accounts is that generally, you need not concern yourself with restrictions on residency. (There is a provision in few states that both the contributor and the account beneficiary live in the state where the account was made).

Another big advantage of a 529 plan is that you do not have to pay for federal taxes even if you are gaining substantial interest.

So how does the 529 account work? This is a prepaid college tuition fee meaning you can pay for your child’s education years before he starts college. You have to research on which type of accounts you want to get because the prepaid plan is restricted to selected schools, while the 529 college savings plan is more flexible and thus more ideal.

So to which expenses can you apply your 529 plan savings account? This can be used to finance education costs like college tuition fee, boarding expenses, books, school supplies and other school fees. It is best to get the plan when the child is still very young because vendors offer more aggressive benefits in such plans compared to the conservative investment plans they provide for those who are about to enter college.

If you already have a 529 account then you are assured that you do not have to pay federal taxes for withdrawals up to the year 2010. After that, the US Congress can decide to extend the tax-free feature or take the alternative route.

If you want to build a college savings fund the easy way then the best choice is a 529 college savings plan. But you have to know which one is right for your family before you begin to invest your money.

As a parent, the big financial concern with your children is funding their college education. Universities and state governments have developed many different financial savings plans to encourage parents to save money for college. Some of the plans include 529 accounts, Coverdell accounts, Roth IRAs and prepaid/guaranteed tuition costs. Unfortunately, few of the programs offer every benefit such as tax deductions, tax deferred savings, unlimited investment options, self directed investments and no penalties.

Selecting a university is a critical and expensive decision. A drawback of the university-based or state-based plans (such as a 529 account) is that they impose penalties if a child doesn’t attend a specific university or in a specific state. Who knows what aptitudes, skills or interests your child may develop that necessitate a specific school that is out of your home state. University and state-based plans also impose penalties if the money isn’t ultimately used for qualified college expenses; another example where an event that is out of your control and may cause an unneeded expense. But the biggest problem with university and state programs are the financial rule changes they make – after you start the plan.

The university and state-based programs are a lose/lose savings plan for parents. If the cost of tuition rises faster than forecasted, in spite their guarantees, they leave you under-funded. Conversely, if tuition rises less than forecasted, then you end up overpaying for tuition. And the same applies to the stock market some plans force you to invest in; when the market fell in 2000 and 2001, many plans broke their promise to guarantee full tuition funding in spite of promises to the contrary.

Another drawback of state-based plans is that your investment options are severely limited to a few mutual funds run by the brokerage firm operating the account. I have evaluated several: and they have high fees and poor returns, and I’m wary of the lack of competition for many of these accounts. The brokerage firms blame economics for the lack of investment choices, saying that most of the accounts are small and not very profitable for them, so they want as little trading and customer interaction as possible.

The federal college savings plans are better because they allow the widest selection of investments (such as an educational Roth IRA or other education savings accounts), and can be applied to most any accredited university. These accounts offer tax-free growth and withdrawal is also exempt from federal taxes and some states taxes. Realistically, your situation may call for multiple accounts. Rules prohibit you from using these if your income passes certain thresholds.

The best place to start saving college is with U.S. government ibonds from TreasuryDirect.gov. These bonds offer the most flexibility and control, and require none of the paperwork and rules of other savings plans. They accrue a decent rate of interest every month, the principal is adjusted for inflation each quarter, the income tax is deferred, and you don’t have any brokerage fees. And when the money is withdrawn for a university on their approved list, the money can be redeemed tax-free. (As for limiting rules: you cannot withdraw the money in the first year, and if you withdraw it within five years, there is a three month interest penalty – so ibonds are not the best savings plan after a child reaches about age twelve). Since ibonds are simply savings not an educational account, the money can be spent for any type of expense that may arise.

When choosing how you are going to fund you child's college education you whould pay mind to the following: many investment options, few penalties, no taxes and total control. These will maximize the money you’re setting aside for that expensive degree.