The Pros and Cons of a College Savings Account

Imagine a child has opened a letter from the college of their choice and they were accepted. Thoughts run through a parent's mind of the costs associated with college. If finances are not in order, the next logical question is, "why wasn't more saving set aside for this life changing event"? The answer is the 529 savings plan.

The 529 savings plan is an account started by families in conjunction with state financial or educational establishments to assist in the saving of funds for college. Prior to enrolling into a college savings plan such as a 529 savings plan, a family should seek the advice of a financial plan manager or an advisor.

Types of plans

The 529 savings plan is broken down into two categories, the traditional savings plan and the prepaid plan. The savings plan is similar to an investment model. The funds are invested in mutual funds and can go up or down, depending on the options selected.

The prepaid 529 savings plan allows a family to pay some or the entire total amount to a participating in-state public college/university. Conversion rates will be applied to out-of-state and private institutions. The prepaid plan also offers an independent 529 savings plan for private colleges.

Benefits

Why use college savings plans such as a 529 savings plan? The benefits of the plan span farther than just saving for a child's education. Federal tax benefits allow the contributor to grow their investment while the tax is deferred. State laws vary in regard to tax breaks, so check first.

The contributor is the sole proprietor of the funds in a 529 savings plan. All decisions such as date of withdrawals and the purpose are controlled by the contributor.

There aren't any limitations to the amount of money deposited into a 529 savings plan. States may have maximums, but the initial and subsequent amounts can adjust. There is also no age limit on the funds. The person going to college doesn't have to be of traditional school age to participate.

Limitations

On the converse side, utilizing a college savings plans such as a 529 savings plan has a 10% tax implications for "non-qualified" withdrawals. Another limitation associated with a college savings plan is certain plans require the beneficiary to be a resident of the state where the plan was generated.

A traditional college plan is age restricted and bound by a grade limit. Don't wait to decide since traditional college savings plans have limited enrollment periods.

Utilizing a college savings plan such as a 529 savings plan reduces the cost of college. The benefits more than double the risks associated with this or any college savings plan. The contributors will see a lower risk, reduced tax implications, more ownership, and control over finances verses a traditional savings plan.