529 Savings Plans Decoded
September is recognized as National College Savings Month, so it’s a great time to sit with the family to discuss and plan for the future costs of higher education.
One option for saving money to pay for college is a 529 plan, or qualified tuition plan. It is a tax-advantaged savings plan created to help fund the expected cost of college. There are two types of 529 plans: prepaid and savings.
Prepaid tuition plans, usually sponsored by state governments, allow families to pay in advance – at current prices – for future tuition costs at participating colleges and universities.
Savings plans allow an individual to set up an investment account for a beneficiary (ex. a parent sets up an account for a child) to pay for college expenses, including tuition, room and board, and books/supplies. They are managed by individual states and often the account holder can choose between several different investment options.
Families should keep in mind that 529 savings plans are considered a resource, and when applying for financial aid, they can reduce the amount of aid for which a student is eligible to receive. Fees can be imposed if a person withdraws funds from a 529 plan for reasons other than paying for college expenses. Families should consult with a financial advisor before deciding if a 529 plan is right for them.
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