529 Plans, sometimes referred to as “College Savings Plans”, are investment vehicles used for the purpose of saving money for a child’s education. Parents and grandparents, aunts and uncles can put money into a plan (or the same plan) for a college bound child with very few restrictions. Obviously, one cannot put more into a plan (and exempt it from taxation) than they plan to spend for college! Most plans will allow deposits in excess of $200,000.00 tax advantaged! However, not every expenditure will qualify for a tax-free withdrawal. For example, a computer may qualify, but an I Pad may not!

A definition of “investment” might suggest it to be money you can afford to lose! Let’s take this one step further. The 529 Plan is invested in mutual funds. Mutual funds are traded in the markets with all the risks associated with the stock market. Savings, on the other hand might be defined as money being “saved” for a future purpose, such as paying for college or for retirement. The question then, is… can you afford to place the money you are saving to pay for your child’s college education into an investment vehicle that could return a net loss instead of a gain? Market risks mean that the funds may grow, but they may also lose value, in part or in whole. Just ask someone who had money in the markets over the past ten years! Additionally, what if the fund has lost considerably when it is time to pay the tuition bill? You cannot tell the college that you will pay them when the fund goes back up! Withdraw those funds then and you lose! Volatility is not something you can afford, and there is often plenty of it in these types of funds!

There are savings plans with guaranteed growth, guarantees of no loss of principal and even in this economy, will accumulate a nice return on your contributions! I could write an entire article on this one subject, but am sure you get the point!

One of the most important reasons to consider an alternative to a 529 plan is because these plans can preclude a family from receiving need based financial aid! Families that possess a 529 in their financial portfolio must disclose the funds when applying for financial aid. State schools expect that you to pay approximately 5 ½ % of the balance of the 529 and private colleges as much as 20% more each year than someone who has no savings plan for their child! In essence, the family that has managed to save money for college will pay more out-of-pocket. Based on savings of $50,000.00, you will spend between $11,000.00 and $40,000.00 more for your child’s education. Sadly, when people begin to fund a 529 plan, they are not told the pros and cons of the plan. And, they usually don’t learn the facts until they begin applying for college aid, or worse… after they are advised of their “Estimated Family Contribution” (EFC). Money in other tax advantaged accounts may also be visible to the aid process. Be careful here!

A more desirable savings plan would not subject your savings to stock market risk! The funds would grow tax advantaged and could be used for college without tax or penalty? The funds could be used for any expenditure, even the weekend pizza party, the I Pad or I Pod! The plan would also be invisible to and excluded from the financial aid process? Yes, such plans exist! A financial advisor that specializes in college planning can help!

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Category: College