Parents today face the difficult challenge of not only saving for retirement but also saving toward their child’s college education. Fortunately there are many tools available to assist parents in saving for college, including the 529 college savings plan, a tax advantaged college savings plan. Here we look at how a 529 saving plan can make saving for college a reality as well as how you can find the best plan.
How to Open a 529 College Savings Plan?
Before you can pick the best 529 savings plan it is probably a good idea to understand what type of savings vehicle you are working with and how it can benefit you. Basically, a 529 savings plan is a tax advantaged savings plan designed to offer tax benefits when the funds are used for college education (Possible tax deductions on contributions and tax free growth and withdrawals when used for qualified educational expenses). The plan gets it’s name from section 529 of the Internal Revenue Code.
Two flavors: Prepaid and Savings. Contributors to a 529 savings plan can choose between a prepaid and a savings plan. With the prepaid plan, tuition credits can be purchased now with current rates and used in the future. This strategy if based on the concept that due to inflation, you will get a better price today than you will several years from now. However, many of these plans are limited only to the state or educational institution in which they are purchased, which limits your child’s choices for education.
The savings plan is based on the growth that you will see in the market. The performance of mutual funds and other underlying investments will determine how much money you make toward college costs. Savings plans and prepaid plans are made available by individual states while prepaid plans are also available through individual education institutions.
How to find the right plan for your needs?
Selecting a 529 plan can be a daunting task and many parents find the process overwhelming. It is important to understand you are not limited to the plan in your state or at your local university.
- Fees. Consider any fees and drawbacks before making your final decision. In some cases it is worth it to pay a professional who is well versed in this area of savings, while in other cases a well informed investor can save these expenses by going it alone.
- Tax deductions. When deciding if you are going to invest money in the state in which you reside, consider there are often many benefits of sticking close to home. If you are able to deduct your contributions in your state or if you live in a state that has high income taxes, it might be more beneficial to keep your money within your state borders. Again, this is an area where you must do your homework to make sure you are not missing out on any benefits or incentives extended to individuals who invest in the state of their residence.
- Investment options. You also need to consider which investment options are available to you. Investment options vary widely since each 529 plan is run by individual states. Some states offer a wide range of low cost mutual funds, CDs, and other investment options, while other states have a narrow selection, some of which might have high fees or may not be appropriate for a short term savings. Many states may offer a plan they run, as well as a plan run by a brokerage firm. Be sure to investigate all options.
- Shop other states. If your state’s plan is not as lucrative as you would prefer, there are out of state programs that combine low expenses with flexible investment options and appropriate risk management. Your final decision should really be based on how affordable the plan will be as well as what types of benefits that particular plan offers to you and your family.
Where to open a 529 College Savings Plan
There are several choices for opening a 529 College Savings Plan: Within your state, in another state, or directly from a university. Many states offer a plan they run, and several states offer a plan run by a brokerage firm. The difference between the two usually boils down to investment options and fees. Many states also offer both the prepaid and savings version. College run 529 plans are usually of the prepaid variety (advantage: possibly lower rates; disadvantage: you are locked in to one university).
If your state offers income tax deductions on your contributions, you may wish to go with your state 529 plan because you will probably save money in long run. However, if your state doesn’t offer tax deductions, or if they do but the fees are too high, then you should consider either opening your 529 plan in another state, or using a broker to manage your 529 plan. The added benefit of using a brokerage firm is the wide range of investment options available to you, though there may be higher fees. One of my recommendations is the Ohio College Advatnage 529 Plan, which is always rated among the best 529 plans by state, according to Kiplinger.
Looking for other college savings alternatives? Check out Coverdell Educational Savings Account (ESA) Plans and compare 529 College Savings Plan and Coverdell ESA. You may find a Coverdell ESA is a better option for your investment and college savings needs.