Parents face overwhelming decisions. Should you use cloth diapers? Is formula feeding the best option? What about daycare? With so many pressing issues, the idea of college may seem like a concern for another day. However, it is never too early to start college planning, according to experts and financial institutions nationwide
After all, the cost of education has skyrocketed. Student loan debt is a crippling problem for the younger generations. That’s why saving in advance can be a great way for parents to set their children up for success. As you weigh your options, keep 529 college savings plans in mind.
Understanding 529 College Savings Plans
These savings plans may be confusing initially. They are not standard savings accounts. They are qualified tuition plans overseen by states, state agencies or educational institutions. These plans are authorized by the IRS under Service Section 529. Although these plans are sponsored by states or other official institutions, they are still managed by standard financial outlets.
There are two delineations of 529 plans. The first is education savings, and the second is prepaid tuition. Not all states offer both, but you will be eligible for at least one no matter where you live. Your eligibility and coverage are based on the state where you reside.
These qualifications and restrictions may make these plans seem cumbersome. However, 529 college savings plans are appealing because the earnings are accrued tax-free. This means that if you start investing when your child is young, the years of dividends will not come with tax penalties.
Eligibility for 529 College Savings Plans
Opening a 529 college savings plan for your child is an investment. Like all investments, you need to understand your eligibility and the benefits. This is the only way to make the best choice for your child’s future.
Research the plans that are available in your state and verify your eligibility. Then, compare the plan options. These plans have preset options for investment. Once you lock into a plan, you may have limited ability to change. In most cases, you have the option to change your investment twice a year. You may also be able to make changes if you update your beneficiary status.
Finally, understand the withdrawal system. Although a 529 college savings plan offers a lot of advantages, there are some limitations. The money from these accounts can only be used for qualified educational expenses. Moreover, not all universities and colleges accept money from a 529 plan. If the money is withdrawn early or not applied to educational expenses, you can expect to pay heavy penalties.
529 College Savings Plans and Financial Aid
This should not be viewed as a drawback. The student debt crisis has shown that many families are relying too heavily on loans. It is better to reduce your child’s need for student loans. A 529 college savings plan can be a critical tool to do just that.
Making Your Choice
The advantages of a 529 college savings plan are clear. However, before you open an account for your child, be sure you fully realize the risks involved. Always research your plan, and ask questions about elements you do not understand.
Look into any associated fees with the plan. These fees will vary based on the plan and the plan’s manager. If you are looking for a plan without fees, there are excellent options available from many institutions.
You should also fully understand the withdrawal requirements and penalties. Saving for the future is smart, but it is not always predictable. Plans can change. You need to know how your money can be accessed at all points, and you deserve to know what penalties and fees may apply.
Ultimately, your child’s future is in your hands. As you navigate all the decisions of parenthood, find confidence in your choice to start a 529 college savings plan.
