529 plans are tax-deferred accounts used to pay for college
expenses for a beneficiary (usually a child/grandchild) ran by states or
education institutions. An investment in a 529 plan is invested in stocks and
bonds and will grow tax free until the beneficiary is ready to use the money.
The deductions are tax exempt if used for qualified college expenses. For the
most part, 529s are a great way to save for your child’s college education but
there are some considerations to think about before investing in one.
Benefits:
·
Tax Advantages: If
you’ve read more than one article from my blog, you know I’m an opponent of
taxes and I focus on helping people pay the minimum amount of taxes as
possible. The money you invest in a 529 will grow tax free and when your
beneficiary is ready to use the money for qualified college expenses, the
earnings will also be tax free. 529 contributions are considered gifts so you’ll
be maxed out at $14K a year in annual
contributions to a 529.
·
Better Returns: 529s
plans are run by States and in most cases have better returns than a simple
savings account or treasury bonds. A parent starting a 529 when the child is
born has ~18 years to save for the child’s college education. Some states do extremely
well and provide amazing rates of return.
·
Realistic Program Management: Unlike
most programs designed by the government, the 529 program is realistic and
versatile. For military members this is especially important because you can
switch 529 programs state to state depending on which state you live or are
stationed in. You have an opportunity in picking which state has a better rate
of return. For all parents, the 529 can be transferred from family member to
family member. If one child doesn’t use it then you can pass it to another
child or to a grandchild.
Considerations:
·
Sole Purpose: The
sole purpose of a 529 plan is to help pay for a beneficiary’s college education.
If you’ve saved more than the cost of a college education and have to liquidate
the account then you will be penalized. If your child chooses not to attend
college or receives a scholarship then you will have to liquidate and be
penalized. The penalty for not using the funds for qualified education expenses
is a staggering 10% so, if possible, only save enough for the education your
beneficiary(s) can use.
·
Financial Aid Concerns: I try
not to expose my political ideologies on my blog but financial aid and social
programs are being abused by many people and not for its original intent.
Financial aid for college is a common place to find such abuse. Many abusers
receive more social welfare money for going to college and use financial aid
with little intent on graduating college. For those parents who tried their
hardest to save for a 529 but will still look for financial aid for their child,
may be impacted in getting financial aid because the 529 will be part of the
parent’s “net worth” calculation (a.k.a. Expected Family Contribution[EFC])
even though the 529 can only be used for college expenses. A 529 isn’t
necessarily a part of the parent’s wealth as it is used for in the EFC
calculation.
·
Limited Investment Options: I
mentioned above that 529 plans have better returns than a savings account or
treasury bonds but there are still limited investment options. You are limited
to the State ran 529 plan for the State you choose. Some states offer deals for
their own residents but the options are still limited.
·
Post 9/11 GI Bill: The Post
9/11 GI Bill allows military members to transfer up to 36 months of education
benefits to a family member. I received my Bachelor’s and Graduate’s degree
using the Montgomery GI Bill (pre-9/11 GI Bill) and haven’t used any of my post
9/11 GI Bill benefits. I can transfer all 36 months to my children (though it
comes with a 4-year Active Duty Service Commitment). So going back to the sole
purpose consideration, be careful how much you invest if you’re planning on
using the post 9/11 GI Bill for your child. You may have to liquidate more than
expected and get penalized 10%.
529s are basically run like mutual funds. My #1 choice for
all information on mutual funds is Morningstar.com. They have a great 529
Center on their site here: http://529.morningstar.com/state-map.action
Be careful when you’re doing a simple search for 529
information. Some of the State-ran plans
are worth several billion dollars and it’s a big business. Like all investments
they want your money so a lot of Google searches will be advertisement-based
over research based. Like I said above, I use Morningstar.com to search through
529s.
