Making It Debt-Free Until Graduation
If you want to set aside funds for your children’s college education, the best yet simplest move is to get a 529 plan. Known legally as “qualified tuition plans,” 529 plans are usually operated by state agencies or educational institutions. Like IRAs, the 529 college plan is also tax-advantaged and is designed to encourage parents to save for their children’s future college costs.
There are actually two classifications of 529 plans – college savings plans and pre-paid tuition plans. The 50 states, plus the District Columbia, support at least one type of plan. Aside from that, there are also universities and private colleges that sponsor pre-paid tuition plans.
1. Pre-paid tuition plans
Mostly sponsored by state governments, this type of 529 plans has residency requirements. Such plan permits college savers to pay for credits or units at any participating colleges and universities for their future tuition. Sometimes, room and board are also covered.
2. College savings plans
This plan allows the account holder to put up an account for the beneficiary to pay for his or her eligible expenses on college. What’s good about this type of 529 plan is that the student and the account holder can contribute through different investment options such as bond mutual funds, money market funds, stock mutual funds and others. Also, your college savings plans can be used at any university or college.
The 529 college plan may give the account holders exceptional tax benefits since your earnings in such plan are definitely not subject to federal tax. In most cases, they are also not subject to state tax, as long as your withdrawals will be really used on tuition and other eligible college expenses like room and board.
Aside from being tax-free, the benefits you’ll get from the 529 college plan are tremendous. Among them are:
* The student or the beneficiary doesn’t have access to the account – the account holders do.
* Anyone can give their contributions to the account.
* If the beneficiary doesn’t have plans to go to college, the account can be rolled over to another family member.
* There’s no way your income will make you ineligible to open an account.
* In most states, there’s no limit as to what age the beneficiary can use withdrawals from the 529 college plan.
* If in case the beneficiary gets a scholarship, the account holder can withdraw the unused money without any penalty.
There are two easy ways to invest in a 529 plan. You can apply directly to the plan manager or through a financial advisor.
