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You are here: Home / College Counseling / 529 plan is, by far, the best way to save for college

529 plan is, by far, the best way to save for college

February 15, 2016 By Brian Caskey

529 planWhen it comes to setting money aside that will be used specifically to pay expenses related to college, a majority of  experts agree that mutual funds, bank accounts and most other investment vehicles that could be used for the same purpose are no match compared to the benefits of using a 529 plan.

“The 529 college savings plan in the financial world today is the best way to save for the expenses of college education,“ said Young Boozer, chairman of the College Savings Plans Network based in Lexington, Ky. “These plans have features that are extremely beneficial to the account opener as well as the student.”

Their primary benefit has to do with income taxes on the account’s earnings. As long as the money is used for qualified college expenses, a 529 is a tax-free investment. Families can put aside up to $14,000 per child each year in 529 plans, pay no taxes on the money while it’s growing and pay no taxes when they pull the money out to pay college bills.

The program gets its name from the tax law which created it. These plans are actually college savings trusts that are set up under Section 529 of the Internal Revenue Service code.

According to the College Savings Plans Network, as of mid-2015, there were a total of 12.3 million 529 college savings plans open nationwide with $258 billion that families have put aside for college costs.

There are no tax consequences for changing the designated beneficiary, which can be either a relative or a friend. If a beneficiary decides not to attend college, parents can close the account but would have to pay a 10 percent penalty and taxes on the earnings portion of the account.

Plans differ from state to state as far as investment choices, investment advisers and fees. Families can open a 529 plan in any state.

While the benefits of 529 plans far outweigh the disadvantages, there are some drawbacks. The money can be only used for qualified educational expenses, such as tuition, room and board, books and computers. Transportation expenses to and from school are not covered. Some families have discovered this when children chose to study abroad and cannot pay airfare with 529 funds.

Late-night pizzas and entertainment items such as football tickets, iPods and computer games also are not considered qualified educational expenses. Nor is the repayment of student loans allowed with 529 funds.

Mark Kantrowitz , publisher of Chicago-based Cappex.com, a website that helps students connect with colleges and scholarships, is a big fan of 529 plans due to their tax advantages and the favorable treatment they receive in the financial aid application process.

In general, it is better to save in the parent’s name rather than the child’s name because parent’s assets are assessed less heavily than a child’s assets in financial aid formulas. A portion of parents’ assets are sheltered. The remaining reportable parents’ assets are assessed on a bracketed scale, with a top bracket of 5.64 percent of asset value.

What that means is if a parent had $10,000 in their name, the 529 plan money would reduce financial aid eligibility by $564. But if a child had $10,000 in his name or her name, financial aid eligibility would be reduced by a flat 20 percent, or $2,000.

By Tim Grant, Pittsburgh Post-Gazette – read the full article here.

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Filed Under: College Counseling Tagged With: 529, 529 plans, college savings accounts

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