Accountancy Resources
A 529 plan, also known as a qualified tuition program, is a type of account designed to save for education expenses. The structure of the account allows for an investor to accumulate earnings on a tax-deferred basis and also withdraw funds tax and penalty-free as long as the funds are used toward education expenses for the beneficiary of the account. When going through the steps of how to find a 529 Plan, one should first understand the differences between the two types of plans, a pre-paid and an investment plan.
Pre-paid plans allow you pre-pay all or part of the costs of education expenses for an in-state public college, though they may also be converted to fund out-of-state college expenses as well as private institutions.
If the goal of the plan is to fund expenses of a private institution an investor may want to look into setting up a Private College 529 Plan also called an Independent 529 plan. With an Independent 529 plan, you will be allowed to buy portions of private institution tuition years ahead of time. This isn’t always available, however, as not every school participates in these plans and an investor may find they are limited in selection.
Pre-paid plans do have their place and they are specifically designed for the beneficiary to attend an in-state public school. If the beneficiary decides to go to a private or out-of-state college, the plan can still be converted however the funds typically do not grow at the same rate as they would in an investment plan vested in equity-based investments. Typically a pre-paid plan works best when the beneficiary already knows they will be going to an in-state public college. At this point, the investor can buy into the plan locking in a discounted rate at the school.
An investment plan is typically beneficial over a pre-paid plan because the investor is in charge of the investments held in the account. This plan is specifically advantageous especially when started for a young beneficiary because it has years to grow through a mix of equity-based and fixed-income investments. Generally, fees associated with a 529 plan are not high in nature, however, it will pay to shop around since many plans offer total fees under 1% annually.
While an investor may struggle to choose the right investments, these plans offer an easy alternative to age-based funds. An age-based fund will have a target year and the fund choice will be based on the age of the beneficiary. The funds typically contain holdings of stocks, bonds, and other investments that have a maturation time horizon in line with the beneficiary’s age. A strategy used by fund managers is to invest more aggressively in the beginning and slowly becoming more conservative as the beneficiary becomes older.
Although plan type is only a first step in how to find a 529 plan, after the selection is made the investor should have a much better grasp and feel for the plans and can begin to analyze the investment selection of the plan they choose.
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