529 College Savings Plan

What Fees and Expenses will I pay if I invest in a 529 Plan?

As with any investment vehicle you always need to keep an eye on the overall fees and expenses that are being charged.  It is not necessarily in your best interest to pay the lowest fee, but you certainly want to know that whatever fee you are paying is helping and not hurting your overall investment return.  For example, would you rather pay a 1% fee and you earn 5% or 2% and earn 10%?  At the same time, fees can hurt your overall return, saving 1% per year by not paying it in fees can really add up over the course of the 18 years until the beneficiary is finally ready to attend college.

The typical state run prepaid tuition 529 plan charges fees for administration as well as enrollment.  There is normally an annual fee for administration but it is charged against the overall guaranteed return.  Because the prepaid tuition plan is more of an installment plan to ensure that future tuition is paid, the overall fees are not as relevant as they are for the 529 savings plan option.  Though it is always good to keep an eye on overall fees for any program, even if it is a state run guaranteed program.

The fees you pay for the 529 savings program are dependent upon your choices and how you implement your 529 saving plan strategy.  All of these fees are very similar to those you would expect from any managed investment that requires state and federal reporting, such as for the different types of retirement accounts.  With each account there will be fees associated with reporting to the government and tracking compliance.  These fees usually only add up to $15-$50 per year.

The other fees you will pay are determined by the type of investment you choose for the overall savings plan.  If you choose a money market there will likely be no associated broker fee.  While if you choose a mutual fund or stock investment, there will likely be a fee associated with the actual management of the investment vehicle.  These are normally called “loads” and fund management fees.

Front End Load & Back End Load

The “load” is either paid up front, during , or on withdrawal from the investment vehicle.  For example, if you invest in a mutual fund that has a front end load you pay a fee every time you contribute to that mutual fund.  If you choose a fund that has a “back end load” you pay a fee on withdrawal from the fund.  The management fees are extra fees that are charged by the management of the mutual fund for managing the overall investment.  It is usually a small percentage of the investment, normally under 1%.

All of these fees may sound like they are exorbitant, but in actuality they are not.  Paying fees is the means by which you are hiring these professional money managers to handle and invest for you.  They are full time professionals that do nothing other than work for you and your investment in order to make it grow as much as possible, given the investment constraints you give them.  The overall fees for the 529 savings plan are not any more than the fees that everyone pays for their IRA plans or other retirement investments.

Savings Plan and Financial Aid

The primary concern for anyone that is planning for college is how to incorporate all assets, including cash and invested savings into their overall financial portfolio as it will be seen by financial aid agencies. We have all heard of those student who have families that make too much for financial aid, but not enough to actually pay for college. Fortunately, the 529 plan can be set up in such a way as to have a minimal impact on your overall financial aid picture. This is not to say that the rules will never change, but as of the writing of this article, this is how it will affect you. Remember that each state, and even each school, is different in how they calculate your financial aid needs. You need to consult with your specific institutions financial aid office to determine their precise methods of calculation.

The first thing you need to know is that the prepaid tuition 529 plan is treated differently than the 529 savings plan on the federal level. Unfortunately, on the state level there are about as many rules as there are states. The important thing to note about a financial aid application is if the application requests information about all available assets that are specifically set aside for your education or just those of your parents and possibly grandparents. This is important because a qualified donor for your 529 plan does not have to be a relative. Therefore if the financial aid application does not explicitly request information about available or set aside assets for your education, that is held by others, then the 529 plan held by others may not be included in your calculation.

For most college financial aid calculations, the prepaid tuition option is looked at as fixed dollar contribution and not as a percentage of assets. This is in juxtaposition to the 529 savings plan which is normally looked at as a parental asset and therefore is not calculated as a fixed dollar deduction, but as a percentage of overall assets. This is fortunate because prior to the 529 savings plan, all college savings plans were looked at as fixed dollar contributions.

In other words if your college expenses were calculated as being $15,000 for a specific year and you had $8,000 in your non 529 college savings plan prior to the calculation, then the $8,000 fixed dollar amount would be deducted from your need based analysis. This would mean that they would see your actual need as $7,000. But with the 529 plan, the $8,000 is considered a parental asset and is therefore used to reduce the expense as a percentage of the account balance. The percentage used for each state is different, but as an example, if it were 10% then the $15,000 overall need would be reduced by $800 leaving $14,200 in need. As you can see the 529 plan provision is much more advantageous to your overall financial need analysis than previous college savings plans and even more advantageous than the 529 pre paid tuition plan.

What are the advantages of a 529 College Plan?

The 529 College plan is the single most effective and useful tool available to save for a college education. While the invested money is after tax, the tax free growth and tax exempt withdrawals make it a tool that you should not overlook. Of course, you still have to make contributions to make the program grow enough to pay for college, but using tax deferred growth over 18 years is an incredible advantage over taxed growth. Add this to the fact that the money is always controlled by the donor and the beneficiary can be changed at any time, and you end up with an attractive, powerful, and advantageous investment plan.

Let us first discuss tax free growth. In any investment vehicle, if the growth is not taxed, the overall return is increased. For example, if you are in the 30% tax bracket and the account grows by 10% in any given year, you would normally have to pay taxes on that 10% gain. This would reduce the overall net investment return to 7%. If you had that gain tax free, then it would remain at the full 10%. Now most people do not see it this way because they feel that the taxes are paid out of current cash flow and not directly out of the investment. Therefore, they feel it is not the same. But that type of thinking is short term. If you think this way, then consider allowing the 10% gain and then contributing the 30% taxes you would have paid as an additional contribution to the investment. When you think of the taxed gain from this perspective you will understand the power of tax free growth.

The fact that the money is always controlled by the donor is another very important advantage. Under this scenario the money will only be used for the beneficiary if the beneficiary goes to college. Under previous college savings programs the beneficiary received the funds at a certain age whether they went to college or not. In other words they would have a lump sum of money available to them to spend hoever and wherever they pleased, not just for college. The 529 program assures the donor that the money will be used as intended or the plan can be transferred to another beneficiary.

The control of the donor will also lead the donor to more aggressively invest than they otherwise would. Because the donor knows that they can withdraw some money in the event of a major emergency, they will be more likely to aggressively contribute to the account. If no emergency arises, the account will then be more likely to have enough money to pay for the college of the beneficiary. If it were not for this total control by the donor, the donor would be forced to mitigate cash flow risk by investing in other savings accounts. The more aggressive savings into the tax free growth of the 529 plan will benefit all involved and is a psychological advantage that cannot be overlooked.

This leads to the final primary advantage. Because the beneficiary can be easily changed then the donor can be assured that the savings will be used by someone who is going to attend college. If the original beneficiary does not choose to go to college the donor can switch to a sibling of the original beneficiary who may go to college. This flexibility will encourage the donor to save because they know that at least someone will be able to benefit form the savings plan. This type of flexibility was not and is not available in any other federally recognized college savings plan.

529 Savings Plan Dilemma

While it is oftentimes said that everyone should be saving for their children’s education, it is not always the best thing for a person to do. This may sound contrary to the advice that is given by so many professional financial advisors, but the reality is that not every parent has enough available cash flow to save for college. This is in addition to the fact that if you do not have enough available cash to save for college, then your child will likely get enough financial aid to pay for their own college.

This is an important thing to note. You do not want to work hard at saving every extra dime to save for your child’s college education at the expense of their life leading up to college. If I had limited funds I would rather use it to help the child have a better primary and secondary school education than save for college. What I mean by this is that it is better to live in an area that has better schools, even if it is more expensive, than it is to live in an area with lessor schools in order to save money for college. Your child will be much better off having been raised and taught in these better schools than in the lower quality schools. If your child chooses to go to college, having been raised in better primary and secondary schools, they can always use financial aid, student loans, or even community college to reduce their overall college costs. But if your child chooses not to go to college, at least you have given the best possible pre-college education.

If you already are in an area with good primary and secondary schools and your overall financial picture allows you the luxury of considering a college savings plan then you should include the 529 plan as one of your considerations. This is something that you should discuss with your tax advisor, your tax advisor can help you understand the specific advantages to the 529 plan and the other college savings programs like Uniform Gifts to Minors accounts and other tax exempt investment vehicles in the specific light of your personal financial situation. It all depends on your overall financial strength and asset picture. You do not want to be savings rich and life poor, but at the same time you do want to maximize tax exempt investment gains. Most of all you do not want to spend taxable investment gains on your child’s college education when you could have invested in a 529 and used tax free gains.

The 529 plan is a modern day plan that is designed to acknowledge and balance the complexities of planning for the future while maintaining flexibility when the future does not come out as planned. The fact that it allows lifetime donor control and changes in beneficiary’s, quite possibly makes it the college savings plan that is best designed to fit the needs of most people. This means that the 529 plan should be the one college savings plan that you absolutely need to discuss with your financial and tax advisors.

Prepaid Tuition Plans Vs College Savings Plans

As you now know there are two primary types of 529 plans available, the prepaid tuition plan and the college savings plan. If you are not clear what a 529 plan is then read our detailed overview of 529 college savings plans. This will help you get familiar with savings plans. Back to the differences. There are differences between the way each state implements their specific 529 plan program. This will serve as an overall guide to the general differences between the two types of 529 plans. We will first take a look at the prepaid tuition plan and then the savings plan.

The 529 prepaid tuition plan is normally administered by the state where the beneficiary holds residency. Each state has their own specific rules as to the deductibility of contributions from state taxes and the taxable nature of subsequent withdrawals. These prepaid tuition programs allow the donor to lock in current tuition fees, in current dollars, and the plan will guarantee that the tuition will be paid no matter what the rate may be in the future. These plans offer maximum security for those using them because they are a guarantee that the beneficiary’s education will be paid in full, whereas the 529 savings plan has no such guarantee. This is a great option for those that want safety and security, but somewhat limits the beneficiary to attending a state school. There are some states that will allow you to move the money to another state school in another state, but you need to check with your state to determine the specific program rules.

The prepaid tuition plans normally cover tuition and fees only. There are a few states that allow for other expenses such as housing. Most of these prepaid plans put the donor on a payment plan based on the selected beneficiary’s age and how many units the plan is being designed to cover. Most of these plans are not only administered by the states, they are also guaranteed by the state. There are other restrictions on these plans such as residency, age, and current grade level of the beneficiary. Check with your state to determine their specific program outline.

The 529 Savings plan on the other hand is much more flexible. But along with this flexibility you lose the guarantee of current year tuition rates and you lose the guarantee of the investment by the state. The investment options in these plans is much more flexible than a prepaid plan and includes stocks, mutual funds, and other allowable investment instruments.

While there is no guarantee of the tuition cost or investment security, there are several primary differences between the savings plan and the prepaid plan. For example, the savings plan distributions can automatically be used for expenses other than tuition such as housing, books, computers, and even transportation. These plans do not have any age limit and you can even have a beneficiary of any age. The plans can also be purchased regardless of residency and they are more easily switched between beneficiary’s. These plans do not limit the beneficiary to a state run school either, the beneficiary is free to attend any school that is allowed under the IRS 529 code. The last difference is that their is no minimum contribution to this type of plan and can it can be started with as little as $25.

Best 529 plans

Choosing the right 529 plan involves a series of decisions and reflections on your overall financial situation. It involves your perception of the future as well as your risk tolerance for investing. It also entails your certainty that your intended beneficiary will even choose to attend college. These are a lot of factors, we will try to cover a few of them here, but many of them need to be discussed in consultation with your tax and financial advisers.

The first is whether you are thinking of a prepaid tuition plan or the 529 savings plan. This is a factor of your own personal risk tolerance and of how you see the beneficiary. Do you think the beneficiary will be attending a state school? Do you think it s wise to lock the beneficiary into knowing they can monetary help, only if they attend a state school? Do you like the security knowing that the tuition will be paid whether or not the rates skyrocket? Do you like the idea that the investment is guaranteed by the state? If you like all of these security features and the virtual guarantee, then you may want to choose a 529 prepaid tuition plan.

But on the other hand, there are advantages to the 529 savings plan over the prepaid tuition plan. The savings plan allows you to start with much less money than the prepaid plan and it does not require regular set payments. If you are starting a plan but do not have a lot of cash now then the savings plan is probably best for you. If you do not want to lock the child into a state school then the 529 savings plan is still probably the best option. If you like the idea that you can aggressively save now, and then if things do not go as well as planned, you can pull some of the money out, then the savings plan is also the best. It really depends on how you see the future and on your current financial status.

Other things to consider are the state specific tax benefits, the overall expenses and fees, the investment options, as well as the flexibility of the specific plan to pay for other schools, even state schools in other states. The rules on how much and how often you can contribute should also come into play. As should the availability to split the investment between aggressive and conservative investment options as the overall balance grows. You may choose aggressive investment in the beginning years, but want to go more conservative with a majority of the portfolio as the child nears college age.

When choosing the best 529 plan for you, these are just a few of the questions that need to be asked. From most of the analysis of the two 529 plans that I have seen, it more or less comes down to having flexibility or a guarantee. If you want flexibility then you need to choose the savings plan. If you need a guarantee then choose the prepaid tuition plan. The only time you do not have a choice is if you are limited in money to start the program. If you are limited in available cash to start, then the savings plan is your only option because you can start it with as little as $25, whereas the prepaid tuition plan requires a much larger lump sum to start.

A 529 college savings plan allows a donor, not necessarily related to the beneficiary, to use after tax money, to save for the beneficiary’s college education. The money saved is allowed to grow tax deferred and the distributions, as long as they are used for the beneficiary’s education, can be distributed tax free.

In many cases the beneficiary can be changed and the donor retains control over the investment at all times. This is not like the Uniform Transfer To Minors accounts of the past, where the money was irrevocable and solely for the benefit of the minor. Should the beneficiary wish to opt out of the program, they can. The distributions they take will be taxable and there will be a 10% penalty. This program is not only a boon for parents and grandparents but also for the investor that has already surpassed their maximum allowable contributions to their IRA and Pension plans.

These are well designed and flexible plans, and the potential for investor abuse is certainly present. But aside from the possible negatives, the positive aspects of the plans for parents an relatives of the beneficiary are enormous. Anyone is eligible to contribute to the plan as long as they designate a beneficiary. Beneficiary’s can be any age. The amount contributed to the plan is limited by what would be a reasonable amount to provide education for the beneficiary. This is not as much a concern because most will keep their contributions below the gift tax limitations. This is because, even though the contributions are using after tax money, they can trigger a taxable event should they exceed the maximum allowable gift tax for that year. The beneficiary can only be changed to another member of the beneficiary’s family. This means that if you are saving for one child, and that child does not go to college or does not use all of the money, the plan can be switched to a sibling, child, or other relative of that original beneficiary, subject to a few restrictions.

Distributions can be made tax free as long as they are being used for the beneficiary’s education expense, and as long as they are made while the beneficiary is attending an allowed institution. The money in the 529 plan can affect the financial aid calculations for the beneficiary. But as of the writing of this, it would only affect that calculation if the donor is listed as the parent of the beneficiary. The current Federal financial aid applications do not ask about funds held for the beneficiary by individuals other than the parents.

What are the differences between pre paid tuition plans and college savings plan?

While there are dozens of companies that can handle and manage your 529 plans and hundreds of investment options available from each of these companies, there are only two primary types of 529 plans. The first is called the Prepaid tuition 529 plan and the other is called the 529 savings plan. You need to understand the differences in these plans before choosing one or the other. This guide will help you know the basics and assist you in choosing the type of plan that is best for you.

What fees and expenses will I pay if I invest in a 529 plan?

The fee structure of the 529 plan you choose is dependent on many factors, including the type of plan you choose and the investment options you select. The specific company you choose to place your 529 plan with can also be a factor in the overall fees and expenses you can expect. But overall, most fees and expenses are similar to those that you see with other managed tax deferred plans such as self directed pensions, self directed IRA’s, and managed 401K plans.

Advantages of a 529 College Savings Plan

The 529 plan has a long list of advantages that were not previously available to individuals that wanted to save for another persons college education. While the contributions are made with after tax funds, the tax deferred growth and tax free withdrawal options are powerful advantages. The fact that the beneficiary can be changed, and that the donor retains full control of the funds, is also an advantage over the old Uniform Transfer To Minors accounts. Read through the advantages and you will see that the 529 plan is a way to save and invest on a tax deferred basis, while still retaining full control of the investment. The donor can also withdraw from the program if necessary at any time and take back all of the contribution. Subject to a small penalty and income taxes on the investment gain within the plan.

Is my financial aid impacted if I invest in a 529 college savings plan?

The first question anyone college bound has when using a college savings plan, or any savings plan for that matter, is if it will affect their overall eligibility for financial aid. The answer to this is two fold. The first is dependent upon the specific institution that you will be attending. The second is dependent upon if the federal financial aid package application is ever changed to include a question about any 529 plans that are hed for you other than by your parents.

Is 529 Savings plan right for me?

This question needs to be answered after a bit of analysis of your specific financial situation. The 529 can be a powerful tool that can be used to help the beneficiary go to a school, or any school, that they otherwise may not have been able to afford. Reviewing these many questions and factors will help you decide if the 529 savings plan is right for you.

How to choose the best 529 college savings plan?

How do you choose which overall plan to start when selecting a 529 Plan? There are many questions and concerns that need to be addressed before choosing. Some of which will be unknown until the beneficiary is almost ready to attend college, and by then, saving for their education may be too late. Determining the right plan is important, but more important is actually starting a plan as soon as possible. The built in plan flexibility can help you sort things out later if need be.