Consider a 529 Plan to Fund Your  Child’s College Education

Joyce A. Taylor,

Financial Advisor

Benjamin F. Edwards

Saving for their children’s college education is one of the biggest financial goals of most parents. The cost of tuition and room and board has risen dramatically over the years, so accumulating sufficient funds can be a challenge.

Today we’ll look at one of the best tools the government has provided to ease the burden: the 529 education savings plan. The number refers to a section of the Internal Revenue Code that went into effect in 1996. The provision allows families to put away money for education in a financially advantageous way.

There are two basic types of 529 plans: savings plans and prepaid plans. The former act like other types of tax-deferred savings plans, letting you put in money that grows without being subject to taxes. The 529 savings plans can provide funds for K-12 tuition expenses at public, private and religious schools (up to $10,000 per year) and for a variety of qualified expenses at colleges, universities or other post-secondary education institutions. Prepaid plans allow you to prepay some or all of the costs of college at today’s costs for future schooling. Both are administered by the state that sponsors them so the specifics vary from state to state.

The terms controlling 529 plans differ from those of many of the retirement plans, often to the advantage of those doing the saving. For example, as long as they are used for qualified education expenses, there are no tax consequence to using the funds when it’s time for students to tap into them, unlike a traditional IRA. Nor are there income limits on those making the contributions. So if friends or colleagues express skepticism about the value and flexibility of a 529, look closely at the rules governing them before you decide they’re not for your family.

Many Options

As 529s have grown in popularity, more plans have become available, with different investment offerings, fees and expenses. Also part of the equation is the effect on your state income taxes. You should spend some time comparing the various plans, and pick one that suits your financial situation best. It’s also a good idea to get help from a financial advisor or a 529 specialist.