A 529 account is basically an investment account to cover future college expenses. It is designed to accrue at a rate equal or greater than expected future increases in educational costs. As long as the savings are used to pay for educational expenses which are covered by the plan, they can grow tax free. Additionally, some states allow a partial or complete tax deduction for contributions to 529 plans. You are not limited to choosing a plan in your home state and your child can attend a university in any state. You can even begin a 529 plan for yourself if you are planning to return to study as a mature age student.
The funds accruing in your 529 account continue to be owned by you, not your child, and you decide when and how the funds will be disbursed. This means that the savings will not affect your child’s ability to receive financial aid if they are otherwise eligible. However, there are some risks with 529 accounts. If you change your mind and decide to withdraw your earnings and not use them for college expenses, you will not only be taxed on them you will receive a penalty of ten percent. Most 529 plans will, however, allow you to change beneficiaries so if one child decides against college, another can receive the benefit. Even if you do not have another child who can receive the benefit, the 529 account can be transferred to any relative including in-laws.
Most 529 accounts have high contribution thresholds, often over $300,000. This means that high earners can easily participate and benefit from 529 plans. Unfortunately, 529 college savings accounts are inflexible. You will be unable to change your asset mix for twelve months. You are also not free to manage the investment yourself; instead you must choose a money manager to manage the investments you choose. If you are not pleased with your choice of 529 account, you are able to change plans no more than once a year.
As with all investment plans, you need to do your research before committing to a 529 plan. It is important to know whether you are required to pay an upfront commission when you establish your account. Other fees and charges also need to be carefully considered. It is recommended that you do not choose an account that charges more than 1.5% annually in charges.
If you take the time to properly research which 529 plan would best suit your needs and circumstances and give yourself enough time to accumulate the funds, you will be able to easily cover educational expenses associated with sending a child to college.
