529 Plans: The Smart Way To Save For College

529 College Savings PlanParents who are in the unenviable position of saving for their retirement and their child's education must start early to ensure their financial goals are met.

The controversial topic of which is more important retirement or college savings becomes less of an issue with proper planning well in advance.

See also: Is the 529 Plan the Most Effective College Savings Plan?

State sponsored 529 plans have been around since 1996, but they have been gaining popularity in the last few years. The following information explains the benefits and risks associated with these accounts.

What Are 529 Plans?

A 529 plan is an investment account that offers tax advantages. These tax advantages make it very appealing as a way to save for college education.

Each state offers a 529 plan and you also can choose between a prepaid plan or a savings plan. The prepaid plan pays for future tuition at today's rate at a specific institution. The savings plan can be used at any institution, but its growth is not guaranteed.

If you use your state's 529 plan, you may be eligible for state tax deductions. Interest earned in the account (when used for qualified educational expenses) is exempt from federal and possibly state taxes.

Benefits Of Using A 529 Plan

This method of saving for college expenses offers benefits beyond tax breaks and deductions:

  • Parents retain control of the fund. This is important if you worry that your child may decide to use their college savings for a trip or a new car. You have control over the account and make the decisions when and how the money will be used.
  • Until you decide to withdrawal the money you, will not have to worry about reporting information on your tax return. The year you withdraw the money will be the only time you receive a 1099 form to report taxable or nontaxable earnings.
  • These plans offer flexibility. You can move your investment to another 529 savings plan or change the beneficiary in if your child does not go to college or receives scholarships which cover the expenses.
  • Most 529 plans allow for substantial deposits and do not limit those deposits to the beneficiary's parent. Grandparents, extended family, and other individuals can contribute to your child's education over the years. In most cases there are no age restrictions or income limitations for these plans.
  • Plans owned by a parent or other donor will not have a significant impact on your child's ability to receive federal financial aid. That's because the 529 account is considered a “parental” asset.
  • With the recent tax code changes, 529 accounts can now be used to pay for up to $10,000 per year of K-12 educational expenses.

See also: Transferring 529 Savings Plans to a New Beneficiary

Risks and Drawbacks

Using a 529 plan can be an excellent way to put money back toward ever growing college expenses. But they are not without certain risks or penalties.

  • Withdrawing money for anything other than qualified educational expenses triggers income taxes on the earnings as well as a 10% penalty. If you have received a state tax deduction you may have to repay that as well.
  • Some colleges take into consideration family owned 529 plans when determining scholarship or grant recipients.
  • Certain savings plans have high administrative fees which can reduce your earnings. It is very important to carefully review all information before committing to a specific plan. Do your research, shop around, and compare plans carefully to find the best option for your family.

U-Nest: 529 FinTech

One of the issues with opening a 529 account is the amount of research and work necessary to choose the right option. The mobile app U-Nest has solved this issue with an easy and intuitive program that can get you saving for your child's education in minutes. Download the app and set up a recurring monthly contribution to get started. From there, you can easily accept gifts from friends and family.

This program invests your money in Invesco Rhode Island 529 Education Savings. U-Nest's team of financial experts examined and analyzed hundred of possible 529 plans from various financial institutions and state providers. CollegeBound Rhode Island program through Invesco offered the best options regarding the following key plan characteristics:

  • historical returns
  • stability of the plan provider
  • low expense ratios and fees
  • automatic electronic monthly investment
  • availability to tailor plan based on the child’s age

This does mean savers outside of Rhode Island will lose out on any 529 tax breaks offered by their home states. But U-Nest's ease of use and low fees could make up for that. If you have been dragging your feet about signing up for a 529 for your child, U-Nest can be a great way to get started and keep track of your contributions.

Learn more about U-Nest here.

The Bottom Line

Every family needs to save for future expenses, whether they are expected or unexpected. For families with children going to college, using a 529 plan can make preparing for the high cost of education makes paying those expenses less of a drain on the household budget.

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Comments

  1. I agree with the last comment. 529 plans are great tools for college education. However, college savings shouldn’t be placed above your retirement planning. I would advise against investing in a 529 plan until you are maxing our your retirement options. Your children can always take out low interest gov’t loans for education; there are no loans for retirement. See more on my site.

  2. I agree with you that 529 plans are a great way to save for college, if you have the money. (I am one of the people who are convinced that saving for your own retirement is more important than saving for your children’s college, but this really comes down to personal choice.) Researching your state’s rules for 529 plans is very important since the rules vary from state to state.