Popular college savings plans
This guide provides a concise introduction to these popular college savings plans, with special sections on how to choose and enroll in a plan, make contributions, and take full advantage of tax-free withdrawals.
Investing for College
There are many different ways to invest for college, but 529 plans offer some of the best benefits.
If you’re planning to pay for your child or grandchild’s college educations, you’ll be investing in one of the most productive ways you can. Not only can higher education provide a sense of personal accomplishment for the child. It also has financial rewards. According to the US Bureau of the Census, the earning potential of someone with a bachelor’s degree is more than double that of a high school graduate.
But to have the money you need to cover the bills when the child is ready to enroll, it’s important to be accumulating savings now. While it may seem like a daunting task, you’ll discover if you shop around that there are a number of smart ways to get started. If you’re already saving, you may find ways to do it more effectively.
One advantage college savers have is that the federal government provides tax breaks to reward your efforts. Several programs, including two types of 529 plans and Coverdell education savings accounts, are designed for accumulating assets to pay for education expenses. The only other types of accounts that enjoy similar tax benefits are those you use to save for retirement and healthcare.
What is a 529 Plan?
For your 529 plan to make the grade, you’ve got to master the basics.
A 529 savings plan is a specific investment program designed to ease the burden of paying college by providing a tax break. By opening a 529 plan, you can contribute money—in regular installments or in lump sums—to an investment account set up for a specific beneficiary. The beneficiary can be anyone—a child, grandchild, cousin or friend.
Your money grows tax deferred in the 529 plan and can be withdrawn tax free for qualified educational expenses. That means you’ll owe no federal income tax, and in some cases, no state tax, on withdrawals as long as you use the money to pay the beneficiary’s college bills, including tuition, books, and some room and board. Graduate, professional, and technical school expenses also qualify.
Although individual states sponsor 529 savings plans, their plans are usually managed by a financial services company. The state works with the management company to determine the investment options that will be offered in the plan. Each of the choices, typically described as a track, is a portfolio of mutual funds, exchange traded funds, or other products.