Ever wonder which college savings plan is right for your child? Through the myriad of choices, it can be quite complicated to figure out which plan makes sense to your specific financial situation. In this 3-part series of blog posts, I will talk about the types of college savings plans available.
There are generally 3 types of college savings programs available: 529 Plans, Coverdell Education Savings Plans, and Traditional or ROTH IRA’s. This post covers the 529 plans.
529 plans consist of 2 types of programs, Prepaid Tuition Programs and College Savings Programs.
529 Plans – Prepaid Tuition Programs
With a prepaid tuition program, you can lock in future tuition at current tuition rates. With college tuition inflation rate at about 8%, double the standard rate of inflation, this sounds like a pretty good deal right? It is, but it’s important to weigh the pros and cons of this type of program.
Advantages of 529 Prepaid Tuition Programs
- 529 Plans can be excluded from the taxable estate. Very important if you’re ridiculously wealthy.
- You have full control of the asset and can change the beneficiary.
- Many states provide state tax deductions or tax exemptions for a portion of the contributions.
- Unused prepaid tuition benefits can be transferred to another family member.
- There is no annual contribution limit to these types of plans.
Disadvantages of 529 Prepaid Tuition Programs
- You must choose a college that your child will attend.
- Your child may not meet the academic and admissions requirements for that college.
- This type of plan prevents your child from choosing where he or she wants to attend college.
- The College you choose might be less than desirable for your child’s major or area of interest.
- Prepaid plans usually only pay for tuition and mandatory fees.
529 Plans – College Savings Plan
The college savings plan is a type of program which allows you to contribute cash to the plan and the contributions grow tax deferred. The plan invests the contributions in growth funds, equity funds, bonds, and money market funds.
Advantages of 529 College Savings Plans
- The 529 College Savings plan can be used for out of state tuition.
- The plan can be used to pay for any qualified educational expenses, including room and board.
- You have full control of the asset and can change the beneficiary.
- These accounts generally have low commissions and management fees.
- You control the withdrawal and payment of expenses.
- There is no annual contribution limit to these types of plans.
Disadvantages of 529 College Savings Plans
- You do not have the right to choose the individual investments in the plan.
- You can only change the investment strategy once per year.
In part 2 of the series I will provide information on the Coverdell Education Savings Accounts.
About Peter Serrano