OVATION: Guest Post – 529 Plans – Are They Right For Your Children’s Future?
Any basic financial life plan will include provisions for your children. Most parents, when thinking about how and when to invest, will focus on basics like paying down debt, setting up retirement, estate planning, and allocating funds for their children’s endeavors.
Usually, the biggest single expense in a child’s life is their education. 529 plans are the most-used savings plans for college. If you want to reap the benefits of these tax-advantaged plans, it’s best to start early. But before you start investing, it’s important to make sure that they are right for you and your kids.
What is a 529?
A 529 plan is a tax-advantaged savings plan that is specific in its purpose – future college costs. 529 plans, also known as “qualified tuition plans,” are run by states, state agencies, or educational institutions. Prepaid tuition plans and college savings plans are both types of 529s.
Here’s how the federal government defines the two:
Prepaid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in prepaid tuition plans that they sponsor.
College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age.
529 plans are exempt from federal taxes, which make them an attractive option for parents looking to stow away money for their children’s education.
For more information on the basics of 529s, check here.
US News & World Report also offers a great guide to understanding 529 plans. Their guide will walk you through the different types of investments offered and their specific risks. Most state-sponsored 529s give investors choices on how their money is managed, but it’s important to know that once your money is in a 529, it’s somewhat locked up.
The SEC offers a solid bit a starting advice for anyone considering investing in 529 plans.
“Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses.”
This means that you need to be pretty sure that you want the money you invest to be used for college specifically – not just random expenses in your children’s future.
If you’re unsure about where you want the money used 10 or 20 years down the line, there are other investment options that give parents more control.
Jackie Waters lives on a three acre hobby farm in Oregon, where she juggles between raising four energetic boys, having a healthy lifestyle and being Hyper-tidy!
Top Photo Credit: Pixabay.com
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