This is Jeff Rose. Welcome to goodfinancialcents.com.
If you’re like me and already have children,
you’re probably already freaking out about
how much college tuition is going to be costing
you in the next five, ten, or fifteen years.
I know that I have been freaking out because
I’ve seen how much college has been going
up ever since I got out. If you’re in that
same situation, let me introduce to you the
529 college savings plan.
I am just going to share what exactly a 529
plan is. How does it work; how do you actually
utilize it? What are the different types that
are available to you, and then what are some
of these flexibilities or benefits of using
the 529 college savings plan in helping fund
your kid’s college education?
First, what exactly is the 529 plan? First
and foremost, don’t get so wrapped up in the
529 numbers. Those just come from the IRS
code when they came up with the name. The
529 college savings plan is a tax advantage
savings and investment vehicle used purely,
and I stress purely to save for your kid’s
college. By putting money into the college
529 savings plan, your contributions or money
that you put in is all after tax. Then, whenever
you go to pull that money out all the interest
in the earnings that have accumulated from
your contributions are completely tax free
as long as you use those towards your kid’s
college education. Now that’s important. If
you end up pulling that money out for something
other than college tuition or college-related
expenses, you will be taxed and penalized
on the interest earnings. But remember your
contributions, the money that you put in are
all after tax, so you can actually pull that
money out at anytime and not incur any tax
or penalties. If that sounds familiar it is
very much like the Roth IRA, except this is
purely used for college.
Who can actually put money into it? Anybody.
You can fund it. Your parents can fund it.
A grand parent can fund it. Aunts or uncles
can fund it. That is one of the perks about
it is anybody can fund it. But here is probably
one of the most attractive reasons that parents
like the 529 college savings plan: The other
tool that you can use is what is called a
custodial account. How that works is you put
money into the account. There is typically
a custodian, which is a parent or grandparent.
Then the child doesn’t actually get the money
until they turn 18 or the age of majority.
Once that child turns 18 they can then take
that money from the custodial account and
do with it what they please. They can spend
it on college if they want, but if they want
to go out and blow it on you name it, they
can do so.
What makes the 529 so attractive is that you’re
always going to have an account owner and
that owner can be a parent, it can be a grandparent,
it can be whoever, but most importantly it
is not the child. The child is then the custodian
of the 529 plan. Once the child reaches the
age of 18 within the 529 plan they are not
in control of the money. That owner, which
is typically the parent, is still in control.
With me, how I set up our 529, I am the owner
and once my first son turns 18, if he doesn’t
want to go to college and wants to pull that
money out and do with it what he pleases,
guess what; it is not an option. I am in control
of that. That is one very, very attractive
feature, that you’ll always have your hands
on that money to where your child can’t make
any rash decisions and go out and blow that
money, especially when you have been saving
it for the last 18 years or so.
That also brings up another question. What
happens if my child doesn’t go to college?
Do I just lose that money or how does that
work? As a reminder, you can always pull out
your contributions so the money you put in
can always come out. The interest or earnings
that have accumulated over that time though
will be taxed and penalized if you don’t use
it for college. One way to get around that
is if you have, say, two children. You could
actually transfer the money from the child
that didn’t go to college over to the other
child’s name where they can use it for their
bachelor’s degree, master’s degree, doctor’s
degree, whatever. You also have the ability
to transfer it over into a close relative,
so if you have a niece or nephew and want
to transfer it over and your close to them
you can also do that too.
Another common question I get is: What happens
if my child receives a scholarship, whether
it is an academic or a sport scholarship?
How that works is this; let’s say they get
a $10,000 academic scholarship and you’ve
got $10,000 in your 529 college savings plan.
Are you going to be taxed and penalized for
pulling that money out? No. Whatever the scholarship
amount is, you’re allowed to withdrawal that
from the 529 college savings plan tax and
penalty free, so that way you can save for
your kid’s college and not have to worry if
they do get that scholarship that you’ve been
saving for nothing. That is one of the little
benefits of the 529 college savings plan.
What are the different types of the 529 college
savings plans? There are actually two different
types. There is the prepaid tuition, and there
is also the savings plan. I will say that
the most popular option that I run into is
the savings plan, but let me first quickly
address the prepaid tuition. The prepaid tuition
is exactly how it sounds. You are buying tuition
based on today’s dollars to pay for at a later
time. How you determine how much you’re paying
depends on the age of the child, the type
of institution you think the child is going
to go to whether it be a junior college, a
state college or a private university, etc.
That is what makes the prepaid tuition a little
bit difficult because, let’s say you want
them to go to a private university, there
is a different rate scale of how much you
have to pay per month based on that. The few
times I’ve come across that it is a pretty
hefty penny to have to commit to to do the
prepaid tuition. Double check with your state
prepaid tuition plan to find out how much
exactly you have to pay if you want to go
that direction.
The more common and more popular method is
the 529 savings plan. How that works is there
is no commitment so you can put in $250 today
and never fund it ever again, or you can contribute
so much per month. You can basically do it
anyway that you want. Also if anybody else
wants to add money into they can as well.
Let me give you a quick example of how we
use it in our own lives. We opened up the
college 529 plan for our first child. We started
funding it and put a couple hundred dollars
in the beginning. We were then putting in
$50 a month just to add to it. Then every
time we had a birthday or Christmas or some
type of holiday where our kid would get money,
instead of going out and buying more toys
that he did not need, we would just put that
into our college savings plan. So that has
just been a really easy and quick way to truly
boost our college savings for him for going
for college. We are doing the same thing with
our second son, and we will do the exact same
thing with our third son.
Those are just some of the common reasons
why you might want to consider the 529 college
savings plan for saving for your kid’s college.
If you want more information, head over to
the blog, goodfinancialcents.com. I have more
information on the 529 plan and the other
savings plan that are available to you. Thanks
for stopping by, and we’ll see you next time.
The opinions voiced in this material are for
general information only and are not intended
to provide specific advice or recommendations
for any individual. To determine which investment(s)
may be appropriate for you, consult your financial
advisor prior to investing.