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What Is The History Of The 529 Savings Plan?

Most parents have come to the realization that no matter the age of their children now is the time to begin a savings strategy for college. Higher education has become to seem like an expensive luxury to many and yet a necessity to most. The workplace has become increasingly competitive and entry-level positions are difficult to obtain without a degree.

The federal government identified this huge problem faced by millions of parents throughout the U.S. and authorized the creation of a program designed to hopefully help with the burden of paying for college by helping parents get a head start. 529 tuitions savings plans was a result of the government’s effort by creating such a college fund.

The plans are named after section 529 of the Internal Revenue Code and they are designed to help parents begin saving for college by providing investment options that allow them to withdraw funds for qualified educational expenses, tax free. Each state has its own incentives so it is important to know your own. Some states allow you to contribute as little as $5 a month into one of these investment plans.

Tax deferred growth on deposits, protection from bankruptcy, and the ability to use funds at almost any college in the US and many abroad, are some of the benefits of the 529 plan. There are two types of 529 plans; pre-paid tuition plans and college savings plans. All states sponsor at least one type and a group of private institutions sponsor a prepaid tuition plan.

There Are Costs Worth Considering

State sponsored 529 plans can be a great option for parents, but they are not flawless. Every 529 plan is different and some are in fact better than others. The federal government has outlined the fundamental qualities of the plans, but you are left to determine by individual states and the sponsor of each plan, which is best for you.

It is best to review as many as possible. In some states residency determines eligibility, while others allow enrollment to cross state lines. There are often additional fee and tax penalties for participants to go outside of your state, but they might have the superior program.

One large disadvantage to the 529 program (which is why parents also begin the program in the first place) is that the funds allocated into the 529 tuition savings account are set aside for the sole purpose of paying for qualified higher education expenses. This is a great benefit for those parents who have children that have been raised and now have the same desire of their parents.

However, for those parents who now have children that have made their minds up to take a different direction in life, the benefits of the 529 savings are wiped out by tax penalties when the funds are not used for educational expenses. There is little way to get around this issue. You must weigh your options carefully.

When you are considering a 529 plan, beware of fees also. You must remember there are underlying fund expenses, state fees, program manager and or sponsor fees, annual distribution fees, account maintenance costs, annual asset based fees that are associated with all of the 529 accounts. Fees, like benefits and incentives vary state by state.