Investing in Education: 529 College Savings Plans

By Kristina Ludwig, Fall 2014 Student Intern

abacus529 Plans come in two different types: the College Savings Plan and the Prepaid Tuition Plan.  Every state offers at least one of the 529 Plans while some offer both.  Also, many private colleges offer the Prepaid Tuition Plan, which I will discuss at length tomorrow.

With a College Savings Plan, you can save up for college or graduate school either for yourself or another designated beneficiary, such as your child or spouse. Furthermore, if you initially set up the account for yourself, but decided not to go back to school, you can transfer the account to your children or spouse tax-free.

College Savings Plans cover “qualified expenses” for postsecondary education, such as tuition, fees, books, supplies, any school required equipment, and room and board. Many states offer these plans without a residency requirement, so you can live in one state, contribute to a plan in another state, and send your child to a school in a third state.  In fact, although there is a maximum contribution amount to each plan (in most states, the maximum amount exceeds $250,000), you can open a second College Savings Plan in another state.  According to FINRA, the IRS only requires that the contribution amount not exceed the amount necessary for that child’s postsecondary needs.  So, if an expensive college and graduate school are in your child’s future, you could create more than one College Savings Plan.  But keep in mind that many states offer state tax advantages for residents who use the local plan, so be sure to investigate your state’s plan and its potential benefits first before going elsewhere.

The College Savings Plan has a number of investment options. Some states offer age-based fund portfolios, which begin by investing in stock funds with higher risk and higher return potential when the designated beneficiary is younger.  But, as the beneficiary grows older, the allocations shift to bond and other fixed-income funds, which are more conservative.  Some states also offer a non-age-based investment options, where you get to select how conservative or aggressive your portfolio is.  Finally, a third option some states offer is investment in certificates of deposit with interest rates that keep pace with the average cost of college tuition.  If you don’t like your investment, the IRS allows you to change it once every year or when the designated beneficiary changes.

There are some risks associated with the College Savings Plan. The state does not back or guarantee your investments and signing up for a College Savings Plan does not lock in tuition prices.  It is possible that you might lose money, especially if you choose to invest in high-risk assets.  So be sure to research your investment options before committing to a plan.

For more information on 529 College Savings Plans, check out FINRA’s Smart Saving for College – 529 Plans here.  For more information on 529 Plans’ fees and expenses, check out what FINRA has to say here.  Especially look at FINRA’s expense analyzer to get a better idea how fees and expenses could reduce your return.