– By Thomas Hauck
You’ve done everything possible to help your son or daughter get into a top college. You’ve kept them on the right track, made sure they got good grades, and perhaps even hired a tutor for those rough subjects. But have you been as diligent with your college savings plan?
Many families are preparing their kids for college but are neglecting to make the appropriate financial plans. Recent research suggests that of the American families who are saving for college, less than one-third (32 per cent) are confident that they will reach their savings goals.
According to OFI Private Investments, research recently conducted by Cogent Research compared responses from two groups: “Savers” (those saving for college) and “Future Savers” (those who will in the future begin saving for college). The results revealed that only three percent of U.S. households currently have enough money saved to pay for college.
The survey discovered that Savers make saving for college a high investment priority, while Future Savers rank college savings lower, behind retirement savings. Household income and education levels make some difference, but are not the only barriers to saving. Current savers may have more resources, but they also have more awareness and understanding of available financial vehicles for saving.
529 Plans Offer a Solution
The survey was developed to gauge the actual level of college savings versus what families may believe or imagine they are doing. As many families know, saving for anything can be a challenge without the benefit of a structured plan. A 529 Plan can be the answer.
Created in 1998 and named after Section 529 of the Internal Revenue Code, the 529 Plan is an education savings plan operated by a state or educational institution. It is designed to help families set aside funds for future college costs. The survey revealed that public awareness of 529 plans was very low; in fact, fifty-six percent of Future Savers stated that they were unsure of the basics of the plan.
So what is a 529 Plan? They can be used as either prepaid or savings plans.
• A Prepaid Plan allows you to pre-pay the costs of an in-state public college education, or convert it for use at private and out-of-state colleges. A prepaid plan for private colleges is called an Independent 529 Plan. Educational institutions can offer a 529 prepaid plan.
• A Savings Plan resembles a 401K or IRA because your contributions are typically invested in mutual funds or similar vehicles. The plan will offer you several investment options from which to choose. The value of the account goes up or down based on the performance of the particular option.
There are substantial tax and other benefits to creating a 529 Plan. They include:
• Federal tax benefits. Your investment grows tax-deferred, and distributions used to pay for the student’s college costs may come out tax-free.
• State tax benefits. Prior to investing in any 529 plan, check to see if your state offers tax provisions because benefits may vary by state, in addition to the federal treatment. Check your state’s tax provisions; if you don’t get any state tax benefits from your state, you can access every other 529 plan from any other state.
• Donor retains control of funds. You can determine how and when the funds are distributed. The beneficiary student has no control.
• Flexibility. Depending upon the program and your state laws, you may change your 529 Plan to a different option every year, or even rollover your account to a different state’s program.
• Low maintenance. After you complete a simple enrollment form, you can sign up for automatic deposits. Then you can relax and forget about it! Funds are managed either by the state treasurer’s office or by an outside investment company hired as the program manager.
• Simplified tax reporting. Donors don’t receive a Form 1099 to report taxable or nontaxable earnings until the year withdrawals are made.
• Substantial deposits are allowed–over $300,000 per beneficiary in many state plans.
Planning on going back to school as an adult? You could even set up a 529 Plan for yourself. Each 529 plan will have different rules, so compare the features and start saving.