College 529 Plans in Lay Terms

College 529 plans are types of savings or investment tools that can be used to help pay for the educational expenses of a designated student. These are especially useful because they often provide a wealth of tax benefits and the ability to limit the effects of inflation. However, there are also a number of disadvantages to college 529 plans and therefore it is wise to gain an understanding of how these savings vehicles work.
And while these plans are typically invested in by parents or guardians of students, they can be utilized by any person who names a beneficiary whom is a student enrolled at least half-time.

College 529 plans come in two distinct types: prepaid and savings. With the prepaid type, an investor (usually a parent or legal guardian) can pay a lump sum in advance in exchange for tuition credits that can be used at a later date. This is similar to how an annuity works. With the savings type, the growth of the money in the 529 is determined by contributions and the performance of the markets where the investments are spread across. Because most college 529 plans of the savings type invest in mutual funds, the growth of the plan is directly correlated to the growth- or lack thereof- of the mutual funds.

College 529 plans have some distinct tax advantages. Provided that the money is used for legitimate educational expenses such as tuition, books, laboratory fees and equipment, transportation expenses, and even off-campus boarding, disbursements and earnings on the plan are tax free. In many cases, contributions to the plan are even tax deductible. Because everyone’s tax situation is different, you should always consult with a tax professional.

College 529 plans are also extremely easy to manage. Prepaid plans require virtually no management at all, while savings types are managed almost entirely but the company that manages the mutual funds. However, these plans can have drawbacks in the sense that funds can only be allocated once per year. This means that if there were significant changes in the market and an investor had already made allocations that year; they would be unable to respond to these new changes.

Finally, a college 529 plan may affect financial aid, so it’s important to learn as much about how this valuable educational savings tool could affect you. In order to find out more now, simply click here for confidential application information for college 529 plans.