College Funds (529 plan)

If you are a parent or plan on being a parent, starting a college fund for your children has probably crossed your mind at least once. The most popular college fund is a 529 plan. They can differ slightly when created depending on the stipulations you want to place and depending on the state you are in; however, for the most part they are pretty similar across the board.

 A 529 fund is similar to a Roth IRA in that they are both an investment fund that involves after tax money. Meaning you take your money that you have already paid taxes on, and put it into a fund on a monthly, quarterly, yearly, etc. basis that is then invested like an IRA or 401K. All the money in the fund when accessed, including money made is taken out tax free. A 529 plan; however, can only be used for educational purposes. Like any potential investment it may not be for everyone here are some of the potential positives and negatives associated with a 529 plan.

Positives:

The main positive that comes with a 529 plan is the tax benefit. All money made while it was being invested goes straight to helping your child pay for college without having to give an extra cent to the government for taxes. The 529 funds are widely accepted at nearly all colleges and universities across the nation, so even if your child wants to go out of state for college they are most likely covered. Anyone who is making a reportable income in eligible to open a 529 plan at any time. For those who are already investing in IRAs and may be close to maxing them out each year this is completely separate. Meaning if you max out an IRA each year and want to invest more, this would be a great option to look at.

Negatives:

One of the main reasons people invest in a 529 plan instead of just placing the money in a separate bank account is because it is an investment account, and has a great possibility of making money. This can also be a negative, as it is more risky. Of course people invest money planning on making money, but there is always the chance that the money you set aside for your child’s college loses money in the process. The other main drawback is the money can only be used for educational purposes. If you hit a rough patch along the way this money cannot be accessed like it would be if set aside in a normal savings account. When money is invested into a 527 plan it has to be viewed on your part as being spent, you are not going to be able to use that money again.

A 527 plan is a great way to plan ahead for your children’s college; however like any investment you should do research first to make sure it is a good fit for you personally and exercise caution.