From our friends at GreenPath Financial Wellness.
As a member of First United Credit Union, you have many options to help you to save for college. Consider these plans:
College 529 Savings Plan
A 529 savings plan is a tax-advantaged option designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are usually sponsored by states or state agencies, and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: pre-paid tuition plans and college savings plans. All 50 states and the District of Columbia sponsor at least one type of 529 plan. Additionally, a group of private colleges and universities sponsor a pre-paid tuition plan.
Investing in a 529 plan may offer college savers unique tax benefits. Earnings in 529 plans are not subject to federal tax and, in most cases, state tax if you use withdrawals for eligible college expenses. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will pay income tax and an additional 10 percent federal tax penalty on earnings. Many states offer state income tax or other benefits, such as matching grants, for investing in its 529 plan. Make sure you review the plan’s tax rules before investing. Some transactions may have state tax consequences for residents of certain states.
Pre-Paid Tuition Plans vs. 529 Plans
Many people are confused about whether they should save using a 529 plan or a pre-paid tuition plan. There are significant differences between the two types of education saving plans.
Pre-Paid Tuition Plans
Pre-paid tuition plans generally allow college savers to purchase units or credits at participating schools for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.
- Locks in tuition prices at eligible public and private colleges and universities.
- All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room and board option or use excess tuition credits for other qualified expenses.
- Most plans set lump sum and installment payments based on beneficiary age and the number of years of tuition purchased.
- Many state plans are guaranteed or backed by that state.
- Most state plans have age limits.
- Most state plans require either the funder or student to be a state resident.
- Most plans have a limited enrollment period.
529 College Savings Plans
529 plans generally permit a parent to establish an account for their child to pay for eligible college expenses. Investment options often include stock mutual funds, bond mutual funds, money market funds, and age-based portfolios that automatically shift toward more conservative investments as the student gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
No Lock On College Costs.
- Program covers all “qualified higher education expenses,” including tuition, room and board, books, etc.
- Many plans have contribution limits above $200,000.
- No state guarantee. Most investment options are subject to market risk that may increase or decrease in value.
- No age limits.
- No residency requirement.
- Enrollment is open all year.
Research Your Investment Options.
Good places to start your planning are the College Savings Plans Network and Savingforcollege.com. Or call First United Credit Union at 616.532.9067. One of our financial experts is ready to help review your options.
Source: GreenPath Financial Wellness, https://www.greenpath.com/student-grant-programs/.