We understand that saving for your child’s college education is a daunting task – it seems far enough away that it’s not real, yet time flies while you’re raising a family. Investing seems like something you can worry about later.

The truth is that you want to start saving for your child’s education soon. If you start investing early, the benefit of a 529 college savings plan grows exponentially. It also means you’ll be ahead of the curve when it’s time for your child to head off to college.

The Benefit of a 529 College Savings Plan: What You Need to Know About Saving for College

benefit of a 529 college savings plan

Finding the right investment options for your college savings plan can be difficult. There are dozens of options available and each one has its own set of terms and features. While different financial institutions offer various 529 college savings plans, there are two types of plans that every financial product is based on:

  • Education savings plans: If you want flexibility in your college savings plan, an education savings plan offers the greatest range of options. You can save money to use on tuition, required fees, and any room and board expenses. You have the option of using these funds at any college, even a few foreign universities, as well as at public, private, or religious elementary and secondary schools.
  • Prepaid tuition plans: If you know your child will be attending a public or in-state college, a prepaid tuition plan allows you to purchase credits at the current tuition rates for your child to use in the future. Typically, prepaid tuition plans only cover tuition and required fees, not room and board. They also cannot be used to pay for tuition at elementary or secondary schools.

In addition, there are also differences in what kind of financial protection is available for these products. Prepaid tuition plans, for example, are generally sponsored – and occasionally guaranteed – by state governments. There are typically residency requirements because of this. Prepaid tuitions plans are not, however, guaranteed by the federal government and your investment could be at risk if the plan’s sponsor has financial troubles.

Education savings plans, on the other hand, generally do not have residency requirements, though they are sponsored by state governments. These plans are not guaranteed by the state, but depending on the type of investment portfolio you choose, you may have some federal protection. Education savings plans are true investment accounts – you may make money, or you may lose money.

Why You Need to Start Benefiting from a 529 College Savings Plan

With all of the other things going on in your life, we know it can be tough to make the decision to start a college savings plan. However, the sooner you start, the greater the financial rewards.

1. Tax Advantages to Starting a 529 College Savings Plan

If you choose a 529 college savings plan that is sponsored in the state you live in, you may be able to deduct your contributions from your state income taxes. A tax advisor can give you more information.

Withdrawals from an education savings plan that you use to pay for qualified education expenses – including tuition to elementary and secondary schools – generally aren’t subject to federal income tax.

2. Investment Options for Your Financial Goals

You can go with a straightforward choice to invest in a prepaid tuition plan if your child is planning to stay in the state, or you can choose a prepaid tuition plan that is sponsored in another state.

An education savings plan gives you the freedom to choose from several investment options that have different levels of risk – and you can use the funds in more situations.

3. Contributions Can Be Made by Friends and Family

A 529 college savings plan gives you a platform for your friends and family to contribute to your child’s education. Rather than material gifts, your loved ones can make a contribution to their future.

We recommend contacting a tax advisor regarding contributions – the laws regarding tax deductions on contributions vary from state to state.

529 College Savings Plan Benefits and Disadvantages

As with all investment options, there are benefits and disadvantages to putting your money into a 529 college savings plan. While we think the tax advantages and investment options are key advantages of 529 plans, there are some disadvantages to consider:

  • Investment fees: Some plans will have enrollment and administrative fees, while others will have ongoing management and service fees.
  • Withdrawal penalty: If you do need to make a non-qualified withdrawal, you will be subject to a 10% penalty on the amount you withdraw.
  • Maturity time: Like any investment account, you need to start investing early to see the most growth from a college savings plan.

While there are a few disadvantages, the reality is that a 529 college savings plan can be a great investment tool if you plan wisely.

Want to know more about the benefits of a 529 college savings plan? Contact Mooney Lyons to learn more about investing in your child’s future.