According to recent College Board data , the average budget for an in - state public college is about $24,061 a year. For a private institution, that average jumps up to $47,831!
While the price of college may seem overwhelming, the government provides several programs to make it more doable for parents who want to help off - set the cost s of their children's college degree. One such program is the 529 College Savings Plan . Named after the section in the IRS Code that deals with it, the 529 plan is a type of investment account that allows you to put money aside for college.
While the 529 College Savings Plan is a viable option, one should be aware of its advantages and disadvantages.
Let's start with some advantages...
With a 529 plan, you have to pay income tax on any money that you invest into the plan. But once the money is there, it can grow tax - free. There is also no tax when you withdraw the money as long as you use it for tuition, room, board or other college - related expenses. If you are able to start saving early on, this feature of the 529 plan can lead to a tax savings worth thousands of dollars. The use of the funds is also flexible in that you can easily change who the beneficiary will be. So, if you don't use the entire balance for your first child, for ex ample, you can assign the rest to your second child, and even to your grandchildren.
Another important benefit of the 529 Plan is its flexibility. There is an assortment of 529 Plans out there, some of which offer additional state income tax breaks in states that collect income taxes. You also have the option of choosing your 529 Plan from any state. So, you can search for the plan most suited to your particular needs and abilities.
There are some pitfalls to keep in mind, though. While the 529 is a long - term savings plan designed to produce a decent return over time, it nevertheless involves investing funds in volatile market securities. Consider what has happened during the financial crisis of 2008, the US credit downgrade in 2011, and the China stock crisis in 2015. The market can and will fluctuate, and the subsequent risks are clear. At times a portfolio's growth rate may be good, but during bad years there is the risk that the investment’s value may drop.
You also need to evaluate the fees and administrative costs of the various options in comparison to the investment results. Finally, if the child opts not to go to college and you are unable to either transfer the money to a relative or use it for other educational purposes, then any earnings on t he amount of money you invested will be subject to income tax as well as a 10% penalty.
Regardless of the pitfalls, the 529 college savings plan is definitely a good option to consider in order to defray the cost of your children’s college education.