College Savings Plans – are they the best choice for
by: Vanessa McHooley
College Savings Plans – are they the best
choice for my child?
College Savings Plans, also called Section
529 plans, are one of the best ways to save for college because they
A variety of investment options
Flexible contribution options
Little impact on eligibility for
need-based financial aid
Investments in 529 plans are usually exempt
from federal taxes. Earnings are tax-deferred and are not subject to
capital gains taxes. Redemptions are also exempt from federal income tax
if they are used to pay for tuition, room and board, fees, books,
supplies, or equipment.
Most states also offer tax advantages, at
least if you enroll in the plan for your own state. In addition,
contributions may be deductible on your state income tax.
In addition to these income tax benefits,
College Savings plans can be a valuable estate planning tool. The
accelerated gift option allows you to average gifts over $11,000 per
beneficiary over a five year period with no federal gift tax. This means
you can contribute up to $55,000 per beneficiary in one year with no
gift tax. Contributions are immediately removed from the donor’s gross
taxable estate (and included in the estate of the beneficiary).
Most states offer three or more investment
options ranging from conservative to aggressive. One is usually an
age-based portfolio that invests mainly in stocks while a child is
young, then shifts to bonds and money-market funds as college years come
closer. 529 plans are managed by experienced investment companies, such
as Vanguard, Fidelity, and TIAA-CREF.
Anyone can contribute money on behalf of a
beneficiary, allowing friends and relatives to give the gift of
education. In addition, the minimum investment amount required to open
an account is usually lower than mutual funds require, making section
529 plans affordable for lower income families.
States set their own contribution limits for
college savings plans. Most states base their limit on an estimate of
the amount of money needed for seven years of post-secondary education.
Limits range from $146,000 to $305,000.
In addition, most states allow you to
regularly transfer funds from your checking or savings account to your
529 plans. Some states even let you set up payroll deductions.
The money in a College Savings Plan is
controlled by the account owner, not the child. So if the child decides
to not go to college, they do not have access to the funds. Instead, the
account owner can get his or her money back (with income taxes and a 10%
penalty owed on earnings) or transfer the funds to another family
Impact on eligibility for need-based
College savings plans have a low impact on
financial aid eligibility because they are considered an asset of the
account owner (usually the parent), rather than the student.
Choosing a plan
Most states have their own College Savings
Plans, but you do not have to enroll in the plan in your state. Look
first at the plans in your own state, especially if they offer tax
advantages. Other factors to consider as you compare state plans are
expenses and investing options.
Prepaid tuition plans
Another type of Section 529 plan are the
prepaid tuition plans. Prepaid tuition plans are guaranteed to increase
in value at the same rate as college tuition. So, if you purchase shares
worth one semester of tuition at a state college, those shares will
always be worth one semester of tuition, even 10 years later when
tuition rates have doubled. These plans offer basically the same tax and
contribution benefits as College Saving plans, and they are guaranteed
by the government. However, because prepaid tuition plans are considered
a resource, they reduce need-based financial aid dollar for dollar.
Therefore, families that expect to qualify for need-based financial aid
should avoid prepaid tuition plans and invest in college savings plans
instead. Another alternative is to roll prepaid tuition plan funds over
into the state's 529 college savings plan before college begins.
There are many advantages to college savings
plans; however, there are many ways a parent can help a student pay for
a college education. Make sure to research as many avenues as possible
to make the most informed decision on how to pay for school, and you
could end up with the optimal college funding solution.
This article is distributed by NextStudent.
At NextStudent, we believe that getting an education is the best
investment you can make, and we're dedicated to helping you pursue your
education dreams by making college funding as easy as possible. We
invite you to learn more about how to get College Savings Plans at
My goal is to help every student succeed - education is one of
hte most important things a person can have, so I have made it
my personal mission to help every student pay for their
education. Aside from that, I am just a pretty average girl from
This article was
posted on February 02, 2005