529 Savings Plan
When it comes to financial planning for college, the primary account that is used is the 529 Plan. A 529 plan is a tax-advantaged investment account designed to encourage saving for future higher education expenses. They are named after Section 529 of the Internal Revenue Code.
There are two types of 529 college savings plans: prepaid and savings. Prepaid plans allow college savers to purchase tuition units or credits, at today’s rates, to be used in the future. Therefore, performance of the account is based upon tuition inflation. Most prepaid tuition plans are sponsored by state governments and have residency requirements. The main disadvantage to prepaid plans is that the most of them cover tuition and mandatory fees only.
529 College Savings Plans are different in that all growth is based upon market performance of the underlying investments. Most savings plans offer age-based asset allocation options where the account becomes more conservative as the beneficiary gets closer to college age. College savings plans are not guaranteed by state governments. Unlike prepaid plans, savings plans cover all qualified higher education expenses. This would include room and board, books, and supplies on top of tuition and fees. When one is ready for college planning, this can make a major difference.
What makes a 529 plan an effective way to save for a future education is that earnings in a 529 account are not subject to federal income tax, and in most cases state tax as long as the distributions eligible college expenses. However, if distributions from a 529 plan are not used for a qualified expense, the earnings will generally be subject to federal income tax and a 10% penalty. Thus, you will want to make sure the funds will be used for a higher education at some point in the future.
Before one begins saving for college, their overall financial situation needs to be assessed as there are many different options, each with there own advantages and disadvantages. It is highly advisable to consult with a wealth manager of financial advisor to see which plan fits the best. Clay Northam Wealth Management can assist in your college planning and give you confidence that you have the proper plan for you. Servicing all of Southern California, we have two convenient offices located in the Los Angeles and Orange County. Please to not hesitate to contact our offices to see how we can be of value to you.