A 529 plan is a tax-advantaged college savings plan designed to encourage saving for future education costs. These plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.The question most people have is, are college savings plans worth it?
Benefits of a 529 Plan
The reasons many families choose to invest in college funds for their education savings is because of its benefits. The first one is basically that this investment tool was literally made for the purpose of saving for education and for children. They were designed to benefit savings for children’s education so they are kind of hard to beat when it comes to this type of savings.
When it comes to money sitting in savings everyone wants a high return on their investment. If you aren’t using your money and it is sitting in the account the very least you would expect is for it to be earning money for you. Historically, 529 plans have a return rate of around 6-7%.
College funds were designed to entice people to save for their children’s education. Because of this they are built in with tax benefits. There are tax benefits such as earnings grow on the tax-deferred basis and qualifying educational expenses are tax-free. This means that if you withdraw money for school expenses than you are not taxed on them and the earnings are deferred or postponed instead of being taxed as they are earned.
529 plans are also known for their low costs. The underlying fund expenses are very low, especially compared to other alternatives, such as life insurance, which comes with extremely high costs and hidden broker commissions. Broker commissions and financial advisor fees tend to add up.
Also these plans have parental control which allows them to call the shots. Family members and friends are also able to contribute which can help in your savings goals.
Other Types of Savings Available
Another question many may ask is what other savings options are out there? Typically if you do your research the most common tools are savings account, life insurance, retirement account and UTMA/UGMA. If you research these investment vehicles you will find that 529 plans are the only ones who offer ALL of the benefits which we discussed above. Because of this it appears they are the best option and are worth it for you and your family. They can be accessed and facilitated by online programs and apps such a U-Nest.com. With u-nest.com, you can download the app, establish a monthly contribution plan, receive gifts from family and friends, and keep track of your savings on the go. If the idea of a college savings plan is new to you, you must check it out!