College Savings Plan Fundamentals

The best time to start saving for your children’s college education is now. College savings plans are tax advantage investment accounts designed to make it easier to save for college and other education related expenses. There are various types of plans offered by state governments, college consortiums, and financial services firms including one of the more popular options a 529 college savings plan. The 529 plans are named for the section of the US Internal Revenue Code establish them.

The benefits of college savings plan are many, however, there are two major benefits. Those two major benefits are tax savings in pre-payment of tuition. Your contributions made into a qualified college savings account grow tax-deferred, which means you don’t pay federal taxes on the dividends and capital gains that you receive before you withdraw any money from the account.

You can withdraw money for certain qualified education related expenses and your investments are also tax free mean you don’t pay tax upon withdrawal. Since investments in the standard taxable accounts are tax at rates ranging from 15 to 35%, the potential savings in taxes from investments in the college savings plan is substantial. There is a catch however, if you withdraw money for purposes other than qualified educated related expenses, you’ll pay taxes plus up to a 10% penalty on your withdrawals.

Many college savings plans allow you to pay for college at today’s tuition rates even if the beneficiary of your account, typically your child won’t be attending college for years. Obviously the benefit is since the rising cost of higher education typically outpaces inflation, paying the tuition early can save thousands of dollars.

Most college savings plans are set up by parents or grandparents on the behalf of the children and grandchildren. However, any adult can set up a college savings plan for any beneficiary. You can even set up college savings plans in which you name yourself as a beneficiary. In other words you can use these plan to save for your own education weather for a college degree or perhaps a graduate degree or any other qualifying educational program.

College savings plans are long-term investment. As with most investments you will ride the up-and-down gyrations of the market conditions and the economy. Keep in mind that if you begin a college savings plan early enough your account balances should not suffer any significant losses.

The point is if you have children and you plan to send them to college you would be wise to enroll in some type of 529 college savings plan.