That baby cradled in your arms may one day head to college and remember (hopefully) to call his mother. As a parent, you can't guarantee regular phone calls from Junior after he leaves the nest, but you can give him the opportunity of a college education.
Investing in a 529 Plan could be a solid way to accomplish that. Below is the 4-1-1 about the 529.
Contrary to legend, there are not 529 reasons to choose this plan, though it is an investment vehicle. The label comes from where the plan exists in the IRS Code in Section 529.
Its purpose is to establish an account for educational expenses after high school. The owner is called the participant and is in charge of the plan; the beneficiary is the future college-bound youngster who seems to grow so fast.
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There's no bad time to start funding a 529, even if Junior hasn't fit in your lap for years. The costs of higher education keep rising, and the federal government continues to place restrictions on student loans. A 529 account could be a way to counter some of these problems.
Let's say an owner (the plan's participant) opens a 529 account with the minimum investment of maybe $1,000. Anyone can contribute to the plan at any time, and it quickly becomes a gifting vehicle for holidays.
Instead of purchasing a toy that is soon forgotten, relatives and friends make monetary contributions to the 529, giving a present that can grow and be used for a positive purpose. So Grandpa has plenty opportunity to spoil his grandchildren.
Most financial planners can handle the 529 plan. There may be small annual fees plus possible fees or commissions.
The owner is free to access the account for educational purposes: to finance a student's law degree from Harvard, for example, or an associates' degree from a local accredited community college.
Unlike pre-paid in-state tuition programs that may place boundaries on a student's choices, the 529 offers a great degree of freedom. Some schools are not eligible, but more than 7,000 are accredited worldwide.
Even Grandpa can become the participant and beneficiary of his own plan, enjoying tax-free growth potential on earnings and sending himself to cooking school in Italy. I know I'm ready.
There are many versions of investment style for the 529 plan, but you should be able to find a plan that suits your strategy.
It's important to note that the specifics of 529 plans can vary from state to state and rules vary.
For instance, you do not have to be a resident of that state to select its plan, though there may be some additional tax benefits if you do.
Regardless of the state's tax laws, federal tax breaks abound. Unlike many investments, this one is tax-deferred. When the money is finally withdrawn for approved educational purposes, it is not taxed by the federal government.
However, if the participant takes the funds and they are not used for qualified expenses, taxation may occur -- but usually only on the earnings. Check with your tax adviser regarding your individual situation.
Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
Research the plans, choose one that matches your needs, and fund, fund, fund. That little baby looks like a smart one.
Jim Zientara, branch manager and financial planner with Raymond James Financial Services Inc., is a member of FINRA/SIPC. He is grandpa to Fletcher, Lucy and Lily. Jim can be reached at 941-750-6818 or www.thefinancialplanningguy.info.