Next to saving for your retirement, perhaps the toughest financial challenge is saving for your child’s college education, as the high cost of college in the US can be intimidating. Saving early for your child’s future education is one of the smartest decisions you can make as a parent. Fortunately, at present, there are numerous flexible ways to save for future tuition costs. The most popular method of saving for college is through Qualified Tuition Programs (QTPs), also referred to as a section 529 plan.
What is a 529 plan? A 529 plan is a savings plan sponsored by a state or an educational institution designed to encourage individuals to set aside money to be able to afford future college cost.
529 plans are exclusively allotted for education-related expenses, such as paying for books and tuition fees at most accredited colleges and universities, vocational schools and eligible foreign educational institutions.
A U.S resident of any state who is 18 years of age or older or at the age of majority depending on the state they reside, can apply for most state savings plans.
The following are some reasons why investing in a 529 savings plan is a smart move:
- The savings plan is tax-advantaged; therefore, there will be no tax on its earnings.
- Your child will not have access or control over the account, only you do.
- If your child decides not to go to college, you can pass the account over to another family member.
- The savings plans don’t have income restrictions that can make you unqualified to apply for an account.
- Anyone can deposit money into the account.
- Most states do not implement an age limit for when the funds should be withdrawn.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.