The 411 on 529s

An investment in knowledge pays the best interest

— Benjamin Franklin

 

Given that it’s “back to school time” started us thinking about the not inconsequential expense of obtaining a four-year degree, a prerequisite of sorts to entering today’s workforce. Specifically, we were discussing how parents, grandparents and others can be financially prepared for what could be some pretty daunting costs, particularly if your college-bound kid someday picks an out-of-state school option.

 

Those of you who have children many years away from making college decisions, or if you’re thinking that some day you may start a family, pay careful attention to this blog, given that it could save you significant costs and a great deal of pain somewhere down the road.

 

Sit Down Before You Read this

 

Let’s get the painful part out of the way first. According to the College Board, which conducts surveys of college pricing, a moderate budget for an in-state public college for the 2017-2018 academic year averaged $25,290. Interested in having your child attend a private college? That price tag jumps to almost $51,000, on average! And, if you have your heart set on an out-of-state college, the costs can escalate even further. Even more sobering is the future cost of a college education. According to CNBC.com, in 18 years the cost of a private school education could reach a staggering $500,000. A public college could tip the scale at around $250,000.

 

Don’t let these costs, the experts say, dissuade you from having your youngster attend college. After all, they’ve worked diligently from kindergarten to 12th grade and have earned a place at the college of their dreams. There are many college funding options, including academic scholarships, government funding programs, bank loans, and financial aid for those most in need who also qualify academically.

 

And then there’re 529 plans, perhaps not as well-known as some of the other college funding strategies, but absolutely worth exploring. Interest piqued? Read on.

 

What is a 529 plan?

 

Simply put, 529 plans (more formally known as qualified tuition plans) are tax-advantaged savings plans designed to encourage saving for future education costs. All 50 states and the District of Columbia sponsor at least one category of 529 plan (there are two types – stay tuned), as do state agencies and some educational institutions. And don’t get too hung up on the 529 number. It simply refers to the section of the Internal Revenue code that authorized them.

 

The Two Types of 529 Plans

 

So, we said there are two types of 529 plans, and we’re keeping to our word. One is a prepaid tuition plan; the other is an education savings plan. Let’s take a closer look at each.

 

Prepaid Tuition Plans – Spend Today, Save Tomorrow

 

A prepaid plan allows a parent, grandparent or another saver to purchase credits at participating colleges and universities – usually public, in-state schools – towards someone’s education at a future date. Why is this advantageous? Because you can lock in today’s college prices for the beneficiary’s use way in the future. The one drawback to these plans is they don’t cover room and board, and you can’t use them to prepay education at elementary and secondary schools.

 

Many of these plans are sponsored by state governments and have residency requirements for the saver and/or the future college student. A caveat: some states guarantee the money paid into the prepaid plan they sponsor; others do not. So, make sure you read the fine print very carefully, because if the money’s not guaranteed, you may lose some or all of it if the plan’s sponsor has a financial shortfall. And, if the college-bound kid opts to attend another school, the prepaid tuition may pay less than if they attend a school that participates in a prepaid program.

 

Education Savings Plans – Save Today, Spend Tomorrow

 

An education savings plan allows a parent, grandparent or another saver to open an investment account to save for someone’s future education, including tuition, room and board, and other college fees. Savers can choose from a range of investment portfolio options, including mutual funds, exchange-traded funds (ETFs), and principal-protected bank products. Investments in these plans can sometimes also be used at non-US colleges, and up to $10,000 per year can be applied towards any public, private, or religious elementary or secondary school, although if you choose the latter option, you’re likely not giving your portfolio much time to grow.

 

Typically, the money is invested in what’s known as target-date funds, which sit inside of the mutual fund or ETF portfolios your provider uses. As the kid gets closer to college age, the portfolio gets increasingly conservative. Education savings plans are sponsored by state governments, some of which have residency requirements for the saver and/or beneficiary, although it’s not a particularly common requirement.

 

Which 529 Plan is Right for Me?

 

The 529 plan you choose really depends on your situation and which state you live in. You should always read the fine print and make sure you’re comfortable with the details – however there are a few things you can keep an eye out for:

 

  • Fees – Both types of plans can have different fees associated to them based on the plan itself, whomever is managing it, and the investments that make up the plan. For example, if your plan is comprised of ETFs, you are responsible for paying the associated ETF fees (typically, these are taken directly from your returns without your knowledge).

 

  • Tax Implications – There are different tax implications that vary based on your state and the plan itself. However, what remains constant is that you have to pay an additional federal tax as a penalty if you withdraw the money for any reason other than education. Make sure you’re familiar with this penalty in the case that your child doesn’t want to pursue a post-secondary education.

 

  • Needs-Based Financial Aid – It’s important to note that having a 529 plan could impact your child’s ability to receive needs-based financial aid depending on the school. Typically, this aid is in the form of loans, so it could still be beneficial to have a 529 plan to avoid as much debt as possible.

 

  • Losing your Money – 529 plans are investments just like any other, and they have the potential to lose some or all of the invested money. State governments do not guarantee 529 plan savings, but some principal-protected plans are FDIC insured because they’re bank products.

 

 

Currently, 529 plans are not supported by our platform but we’re working on having them soon! Sign up for our newsletter to be the first to know when we add them.

 

Not interested in 529 plans? Send us an email at support@emperorinvests.com and let us know which accounts you’re interested in and we’ll add them to our list.

 

All the best,

 

The Emperor Team