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Everything You Need to Know About 529 Plans

You've invested in diapers, wipes, baby clothes, board books, a crib, stroller, lotions, diaper cream and a million other must-have baby items. Now let's pretend that there's money left over in your bank account to start saving for your child's college education. The rising cost of education, coupled with your child's lack of athletic ability, means that you should start being proactive about college saving and stop praying for a scholarship.

I sat down with David Horvitz, CFP to get the scoop on 529 college savings plans. Does my kid need one? Are all 529 plans the same? What other options do we have? What if my kid doesn't end up going to college (gasp)? How do I know which 529 plan is best? Will a 529 account prevent my child from getting financial aid? I really had a lot of questions. Lucky for me, David is a very patient man.

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Why should I invest in a 529 plan for my child's college education?

There are many benefits to a 529 plan, but the biggest ones are that the earnings grow tax free and there is no tax upon withdrawal. A Custodial Account is another option that can be used for college savings, but the gains are taxed.

Why would I invest in a Custodial Account?

Custodial Accounts can be used for anything that's of benefit to your child, not only college savings. There ae also more choices when it comes to investing. There are pros and cons. Once your child reaches the age of maturity, they could potentially blow the money on a Ferrari, definitely a con. But if managed properly by a savvy investor, these can be a great vehicle for college savings.

Do I have to use the 529 plan that's offered in my state?

No, you can invest in any state's 529 plan. There are different fees and expenses for each state's plan, but they are all created fairly equal. Look at your own state's plan since it may offer a state income tax break to residents. Consult with a trusted financial planner if you still have questions about which one is best for you.

Can my child use the funds from a 529 account to go to college in any state?

Yes, you can use the money from a 529 plan to go to almost any school including some international schools. Where the plan is based has nothing to do with what state your child can go to college. The funds can also be used toward lab fees and in some cases even room and board.

Will I lose my investment if my child doesn't go to college?

Think outside the box. There are many uses for a 529 plan other than a traditional four-year college. Your child could also use the money to attend a vocational school. In the event that your child opts out of any type of postsecondary education, you can easily transfer the funds to any other beneficiary (another child, relative, etc.).

What if we need the money for an unexpected reason other than educational purposes?

Rest assured that you will never lose the entire amount of your investment. If something unexpected happens and you have to tap into these funds, you'll have to give up 10 percent of the earnings portion to a penalty tax and also the incurred income tax. Not ideal, but not horrible.

How does a 529 plan impact my child's ability to get a student loan?

Many factors are used to determine financial aid eligibility. It's a combination of the child's assets and the parent's assets, among other things. A 529 plan is considered to be part of the parent's assets and only accounts for about 5 percent of the decision of how much financial aid to grant to a student.

Can my child withdraw money from a 529 plan?

Your child has no legal rights to a 529 plan, so the answer is no. Whoever sets up the 529 plan has total control over the account and the distribution of its assets at all times. This is the benefit of a 529 over a Custodial Account, because you will always have control over the funds, regardless of the age of your child.

Can other people contribute to my child's 529 plan?

Absolutely. Grandparents and other relatives love the idea of contributing to a college savings account. Every year an individual can gift up to $14,000, but for a 529 plan they've made an exception and allowed for up to 5x that contribution without any gift tax consequences. This can be done every five years and can really accelerate your child's college fund considerably.

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Anything else we should know?

Regardless of whether you choose a 529 plan, Custodial Account or other savings vehicle, the most important thing is to put money away and save on a regular schedule. Don't let uncertainty be what stops you from starting. If you have questions, find a financial advisor you are comfortable with to guide you through the process.

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