Ask an Advisor

 

In this series Empirical advisors answer common questions about financial planning and investing as an individual. If you have a question for our advisors, please leave your name and question in the comment section at the bottom of this article.

529 Plans Explained: Saving for College

Whether your child was just born or is quickly approaching the college application process, you may want to provide some of the money for their tuition. If this is the case, then a 529 plan might be appropriate for you.

What is a 529 plan?

Simply put, a 529 plan is a tax-advantaged vehicle to save for future college costs. They are sponsored by states or educational institutions, and there are two types of  plans:

  1. Pre-paid tuitions plans (like Washington State’s Guaranteed Education Tuition (GET) program)
  2. College savings plans (like Nevada’s 529 College Savings Plan)

Pre-paid tuition plans allow you to currently purchase “units” at participating colleges for future tuition. Under many state plans, the “units” you purchase today are guaranteed by the state to keep pace with rising tuition costs. Under the GET program, 100 “units” equate to one year of resident, undergraduate tuition at the highest priced public university in the state. The unit price for 2012 to 2013 is $172. If your child was born today, and you purchased 100 “units,”, it would cost you $17,200. In 18 years when your child begins college, the first year of tuition would be covered by those “units,” regardless of tuition costs at that time.

College savings plans, in contrast, allow someone to establish an account for a student and then select among a variety of investment options. These accounts are not guaranteed by the state – your savings account value fluctuates in accordance with your investments, meaning you are taking on the investment risk in this type of plan. This is in contrast to pre-paid plans where the state takes on the investment risk.

What are the advantages of a 529 plan?

  • Investment grows tax-deferred
  • Distributions are tax-free if used for qualified college expenses
  • Some states allow deductions for contributions, depending on the 529 plan

What are the disadvantages of a 529 plan?

  • Non-qualified expenses are subject to income tax and a 10% federal tax penalty on earnings
  • There are fees such as enrollment, maintenance and asset management fees depending on the type of plan
  • Assets in a 529 plan generally reduce financial aid eligibility because the assets affect the Expected Family Contribution (EFC) calculation

See the SEC page on 529 plans, for a more comprehensive overview. For more detailed advice, our financial advisors would be happy to answer any questions, as well as provide 529 investment recommendations.

Tags: , ,

About Shan Zubair

As a financial advisor, Shan works closely with his clients to help define and commit to their retirement and investment objectives. Shan is a Certified Financial Planner™ and Chartered Mutual Fund Counselor (CMFC®).

Trackbacks/Pingbacks

  1. Too late to the 529 game? Here are a few alternative..- Ask An Advisor - March 5, 2013

    [...] your child’s college years will get here sooner than you imagine.  Many people intend to start 529 plans for their children’s education, but may not have the extra cash flow necessary to get the ball [...]

Leave a Comment