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ALL ABOUT 529 PLANS

As the summer winds down and you prepare for the kids to go back to school, it’s a great time to set up or increase your funding in a 529 College Savings Plan.  What is a 529 College Savings Plan and how can it help you manage education costs while providing tax savings?

The SEC’s definition of the 529 College Savings Plan is “a tax-advantaged savings plan designed to encourage saving for future education costs. These “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

529 Plans are typically established by a child’s parent or legal guardian, but anyone, including grandparents, can open a 529 Plan for the benefit of a particular child.  Owners of the account can also establish contingent owners to manage the account in the event of their death.  It is also possible to change the beneficiary of the account from one child to another if the first chooses not to attend college or doesn’t use the entire accumulated balance.

While 529 plans have been available to investors for decades now, recent tax legislation expanded their qualified use to include college education costs AND private K-12 tuition and expenses.  These plans enjoy the benefit of tax-free savings if used for the aforementioned qualified expenses.  In addition, each state provides its own 529 plan and you may select from among several plan providers to find the best option for your family.

There are generally two types of 529 College Savings: college savings plans and prepaid tuition plans.  Many states offer guaranteed pre-paid tuition for any in-state university.  They calculate the future cost of education for your child and lock in a rate in today’s dollars.  You may pay monthly, annually, or in one lump sum to pre-pay your child’s tuition.  While these plans are a great option, the payments often prove unaffordable for many families.  In this case, parents and grandparents may opt for a college savings plan, where you invest on a regular basis (dollar-cost averaging) into mutual funds and bond funds.  This funding style requires a longer time-horizon in order to have greater likelihood of market appreciation for your investment.

Many college institutions include the balance in your 529 College Savings Plan as part of your assets if your child applies for financial aid, so this is one item that must be carefully considered prior to funding your investment.

College savings plans usually offer “Target Date Funds” that automatically adjust the positions in your 529 portfolio based on your ever-changing time horizon (length of time until your child attends college).  These funds are popular because they take the guesswork out of managing the risk in your account.  Seeking the guidance of your financial advisor is the best way to determine if these funds would be right for your 529 account.

As you fill your shopping cart with Back-to-School supplies, don’t forget to save for your children or grandchildren’s future education needs.  Talk to your financial advisor about the 529 college savings plan that is right for you and your child.  Advisors at Planning Solutions Group can help determine how best to include a 529 Plan into your overall financial plan.  Contact us today at 301-543-6000.