Those who want to put money into a 529 college savings plan
should know about how these kinds of investment opportunities
have been revamped and improved during recent years. Now, some of
the newest reports on these useful investment vehicles for higher
education show that the costs of many of these plans are coming
A Jan. 10 piece in
U.S. News & World Report
goes over the details of how higher education experts are seeing
costs go down for a variety of 529 plans. For example, the report
cites information from public officials in the state of
Pennsylvania, where fees are expected to drop by more than 20%
This report also goes into some of the reasons why parents are
getting more for their money when they opt for a 529.
Interestingly, rather than new federal guidelines or expanded
rules on 529s, these savings owe to the fact that fund managers
are simply charging less for their services.
The context of lower plan fees
There are a couple of things at work here. Reports about the 529
changes for 2014 are suggesting that there is a kind of "race to
the bottom," which is somewhat common in various parts of the
business world, where fund managers are competing with each other
to offer lower prices.
However, there's also a greater context. We previously
reported on how hedge fund managers, in general, were backing
away from a traditional high-cost price model for their services.
The same thing could be true here with 529s. In some indirect
ways, the hedge fund market could also have an impact on how much
parents or guardians pay for the college plans.
Analysts also suspect that some 529s are moving toward less
expensive investment models. More passive investment vehicles
need less active management -- you don't have to pay people to
sit there buying and selling individual equities or products --
and that can translate to savings for customers.
Other expansions of 529 purchasing power
New lower plan fees aren't the only reason that parents are now
able to get more out of the dollars they put into 529 savings
plans. For example, with the right kind of planning, those who
are setting up these plans for their children can pay for more
types of educational costs with the funds than in past years.
Some types of 529 expenses are qualified by the IRS on a
case-by-case basis. However, in many cases, it's possible for
parents to pay for room and board up to a certain amount with 529
money. Also, as technology becomes a bigger part of education,
the IRS is more likely to allow extra 529 coverage for expenses
like laptops, tablets, and mobile devices, as well as educational
software and digital versions of textbooks and study guides. This
means that more of the things you would buy with your Kindle
could be paid for with a 529 plan.
What's behind 529 plan savings?
Even with these new announcements about college plan advantages,
many heads of household don't really know about how these plans
help families to afford higher education.
The basic fundamentals of 529 plan investment are that those
who contribute can invest that money tax-free for all of the
years before a child starts at a college or university. Since
that's nearly two decades, there are a lot of ways that the money
can grow during that time. By allowing this capital to grow
tax-free rather than affecting annual filing, a 529 plan makes an
excellent way to save more of what you make if you're planning to
pay for post-secondary education for a family member.
That's basically what a 529 plan is. In fact, not many people
know that these plans are actually named for a section of the tax
law that offers the opportunity for tax-free education planning.
Too many people think that a 529 plan is just a hedge fund
offering or some kind of financial product sold only to the
wealthy. Getting a firsthand look at these plans destroys that
myth effectively. In most cases, there aren't sky-high minimum
contributions or other barriers for middle-class families to get
involved in these kinds of savings, which are basically handed
out by the federal government, not by a bank or financial
Using tools like college 529 plans, a good individual
retirement account or 401(k), and other kinds of tax-related
investment vehicles, individuals can save and grow more capital
as they edge toward the end of their working lives.
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