College Savings Accounts and 529 PlansIt's never too early to start saving for college. In fact, the earlier you start, the more you can take advantage of compound interest and other savings strategies. So what are your best options for college savings? Here are a few ideas to get you started.
A college savings plan is a long-term investment account that offers tax advantages to help you save for your child’s or grandchild’s higher education expenses. There are a few different ways to save for college, but one of the most popular options is a college savings plan. College savings plans are tax-advantaged accounts that can be used to cover qualified expenses, such as tuition, fees, and room and board. Contributions to a college savings plan can be made by the account holder or by other family members and friends, and there are many different types of plans to choose from. Some college savings plans are sponsored by state governments, while others are run by private financial institutions. For example, the 529 College Savings Plan is sponsored by states, while the Coverdell Education Savings Account is offered through private banks and credit unions.
A 529 college savings plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, named after Section 529 of the Internal Revenue Code, are sponsored by states, state agencies, or educational institutions and are administered by financial institutions. 529 plans offer tax advantages and other benefits as an incentive to save for college. Contributions to a 529 plan are not federally tax-deductible, but they may be deductible from state taxes. Earnings grow tax-deferred, and distributions are federal and state tax-free if used for qualified higher education expenses such as tuition, fees, books, and room and board.
Different 529 Savings Plans
There are two types of 529 plans: prepaid tuition plans and college savings plans.
Prepaid tuition plans allow investors to purchase units or credits at participating colleges and universities today at current tuition rates.
College savings plans are invested in a portfolio of stocks, bonds, and other assets, similar to a mutual fund.
A 529 college savings plan is a great way to save for a student's future education expenses. The account is established in the student's name and the account owner retains control of the account. The account owner chooses the investment options and can change them at any time. The account funds can be used to cover tuition, room and board, books, and other qualified education expenses at any accredited college or university.
Setting Up a 529 College Savings Plan
There are a few requirements to open up a 529 college savings plan.
The account must be established in the United States by a state or educational institution.
The account beneficiary must be a U.S. citizen or resident alien with a Social Security number or tax identification number
The account owner must be 18 years of age or older and have a valid Social Security number or tax identification number.
Among the best providers that offer 529 college savings plans are Fidelity, Schwab, CollegeBacker, and Vanguard. All four providers have a variety of options to choose from, and all have been rated highly by Morningstar. In addition, all four provide free college savings calculators on their websites.
Best 529 Plan Providers
Fidelity's calculator allows you to input your child's age, the amount you've saved so far, and the monthly amount you plan to save.
Schwab's calculator is similar, but also allows you to input the expected rate of return on your investment.
Vanguard's calculator is the most complex, allowing you to input a variety of factors including the expected rate of return, inflation, and the number of years until your child starts college.
Another option is CollegeBacker, which offers a 529 plan with no fees and no minimums. They also have a goal calculator on their website that can help you figure out how much you need to save. In addition, they offer advice and resources on their blog to help you make the best decisions for saving for college.
As of January 2020, every state in the US offers at least one 529 college savings plan. Most states offer multiple plans, with a variety of features and benefits. The average tax credit for 529 plans is $2,500 per year. However, some states offer larger tax credits, and some states offer no tax credit at all. Because the rules and benefits of 529 plans vary from state to state, it's important to research the options in your state before opening a account. By doing so, you can ensure that you get the most out of your college savings plan.
Finding Out if Your State Offers 529 College Savings Plans
One of the benefits of creating a 529 college savings plan is that it can help you to save money on your taxes. The money that you contribute to the plan grows tax-deferred, and withdrawals are tax-free as long as they are used for qualifying educational expenses. This can be a significant advantage if you are in a high tax bracket. Another benefit of the 529 college savings plan is that it offers flexibility and control. The account owner, not the beneficiary, maintains control of the account. This means that you can change the beneficiary if necessary, and you can also withdraw the funds for non-qualified expenses if needed.
Benefits and Things to Keep in Mind
However, there are also some disadvantages to consider. One of them is that the money in a 529 college savings plan belongs to the account owner, not the beneficiary. This means that if the account owner dies, the money would be included in their estate and subject to estate taxes. Another disadvantage is that there could be restrictions on how the money can be used if the beneficiary decides not to go to college. Overall, the benefits and disadvantages of a 529 college savings plan should be carefully considered before opening an account.