529 College Savings Plan

This is Jeff Rose. Welcome to goodfinancialcents.com.
If you’re like me and already have children, you’re probably already freaking out about
how much college tuition is going to be costing you in the next five, ten, or fifteen years.
I know that I have been freaking out because I’ve seen how much college has been going
up ever since I got out. If you’re in that same situation, let me introduce to you the
529 college savings plan. I am just going to share what exactly a 529
plan is. How does it work; how do you actually utilize it? What are the different types that
are available to you, and then what are some of these flexibilities or benefits of using
the 529 college savings plan in helping fund your kid’s college education? First, what exactly is the 529 plan? First
and foremost, don’t get so wrapped up in the 529 numbers. Those just come from the IRS
code when they came up with the name. The 529 college savings plan is a tax advantage
savings and investment vehicle used purely, and I stress purely to save for your kid’s
college. By putting money into the college 529 savings plan, your contributions or money
that you put in is all after tax. Then, whenever you go to pull that money out all the interest
in the earnings that have accumulated from your contributions are completely tax free
as long as you use those towards your kid’s college education. Now that’s important. If
you end up pulling that money out for something other than college tuition or college-related
expenses, you will be taxed and penalized on the interest earnings. But remember your
contributions, the money that you put in are all after tax, so you can actually pull that
money out at anytime and not incur any tax or penalties. If that sounds familiar it is
very much like the Roth IRA, except this is purely used for college. Who can actually put money into it? Anybody.
You can fund it. Your parents can fund it. A grand parent can fund it. Aunts or uncles
can fund it. That is one of the perks about it is anybody can fund it. But here is probably
one of the most attractive reasons that parents like the 529 college savings plan: The other
tool that you can use is what is called a custodial account. How that works is you put
money into the account. There is typically a custodian, which is a parent or grandparent.
Then the child doesn’t actually get the money until they turn 18 or the age of majority.
Once that child turns 18 they can then take that money from the custodial account and
do with it what they please. They can spend it on college if they want, but if they want
to go out and blow it on you name it, they can do so. What makes the 529 so attractive is that you’re
always going to have an account owner and that owner can be a parent, it can be a grandparent,
it can be whoever, but most importantly it is not the child. The child is then the custodian
of the 529 plan. Once the child reaches the age of 18 within the 529 plan they are not
in control of the money. That owner, which is typically the parent, is still in control.
With me, how I set up our 529, I am the owner and once my first son turns 18, if he doesn’t
want to go to college and wants to pull that money out and do with it what he pleases,
guess what; it is not an option. I am in control of that. That is one very, very attractive
feature, that you’ll always have your hands on that money to where your child can’t make
any rash decisions and go out and blow that money, especially when you have been saving
it for the last 18 years or so. That also brings up another question. What
happens if my child doesn’t go to college? Do I just lose that money or how does that
work? As a reminder, you can always pull out your contributions so the money you put in
can always come out. The interest or earnings that have accumulated over that time though
will be taxed and penalized if you don’t use it for college. One way to get around that
is if you have, say, two children. You could actually transfer the money from the child
that didn’t go to college over to the other child’s name where they can use it for their
bachelor’s degree, master’s degree, doctor’s degree, whatever. You also have the ability
to transfer it over into a close relative, so if you have a niece or nephew and want
to transfer it over and your close to them you can also do that too. Another common question I get is: What happens
if my child receives a scholarship, whether it is an academic or a sport scholarship?
How that works is this; let’s say they get a $10,000 academic scholarship and you’ve
got $10,000 in your 529 college savings plan. Are you going to be taxed and penalized for
pulling that money out? No. Whatever the scholarship amount is, you’re allowed to withdrawal that
from the 529 college savings plan tax and penalty free, so that way you can save for
your kid’s college and not have to worry if they do get that scholarship that you’ve been
saving for nothing. That is one of the little benefits of the 529 college savings plan. What are the different types of the 529 college
savings plans? There are actually two different types. There is the prepaid tuition, and there
is also the savings plan. I will say that the most popular option that I run into is
the savings plan, but let me first quickly address the prepaid tuition. The prepaid tuition
is exactly how it sounds. You are buying tuition based on today’s dollars to pay for at a later
time. How you determine how much you’re paying depends on the age of the child, the type
of institution you think the child is going to go to whether it be a junior college, a
state college or a private university, etc. That is what makes the prepaid tuition a little
bit difficult because, let’s say you want them to go to a private university, there
is a different rate scale of how much you have to pay per month based on that. The few
times I’ve come across that it is a pretty hefty penny to have to commit to to do the
prepaid tuition. Double check with your state prepaid tuition plan to find out how much
exactly you have to pay if you want to go that direction. The more common and more popular method is
the 529 savings plan. How that works is there is no commitment so you can put in $250 today
and never fund it ever again, or you can contribute so much per month. You can basically do it
anyway that you want. Also if anybody else wants to add money into they can as well.
Let me give you a quick example of how we use it in our own lives. We opened up the
college 529 plan for our first child. We started funding it and put a couple hundred dollars
in the beginning. We were then putting in $50 a month just to add to it. Then every
time we had a birthday or Christmas or some type of holiday where our kid would get money,
instead of going out and buying more toys that he did not need, we would just put that
into our college savings plan. So that has just been a really easy and quick way to truly
boost our college savings for him for going for college. We are doing the same thing with
our second son, and we will do the exact same thing with our third son. Those are just some of the common reasons
why you might want to consider the 529 college savings plan for saving for your kid’s college.
If you want more information, head over to the blog, goodfinancialcents.com. I have more
information on the 529 plan and the other savings plan that are available to you. Thanks
for stopping by, and we’ll see you next time. The opinions voiced in this material are for
general information only and are not intended to provide specific advice or recommendations
for any individual. To determine which investment(s) may be appropriate for you, consult your financial
advisor prior to investing.

17 Replies to “529 College Savings Plan”

  1. Very Informative… Thank you.

    I have one question though. Can we save money for our own educations such as pursuing a Masters degree or even some Doctoral degrees…

  2. Thanks man!
    …another great video. Im late to this investments deals(retirement, student), but not too late(41). Toons of good info, i feel like I owe you $$$ for your advice.

  3. One question Bank of America has a 529 program with Merrill linch, is better to open an account with a bank or through the state of Florida where we live. Hope you can help me out.

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