529 College Savings Plan - YouTube

This is Jeff Rose.

Welcome to goodfinancialcents.com.

If you're like me and already have children, you're probably already freaking out about

how much college tuition is going to be costing you in the next five, ten, or fifteen years.

I know that I have been freaking out because I've seen how much college has been going

up ever since I got out.

If you're in that same situation, let me introduce to you the 529 college savings plan.

I am just going to share what exactly a 529 plan is.

How does it work; how do you actually utilize it?

What are the different types that are available to you, and then what are some of these flexibilities

or benefits of using the 529 college savings plan in helping fund your kid's college education?

First, what exactly is the 529 plan?

First and foremost, don't get so wrapped up in the 529 numbers.

Those just come from the IRS code when they came up with the name.

The 529 college savings plan is a tax advantage savings and investment vehicle used purely,

and I stress purely to save for your kid's college.

By putting money into the college 529 savings plan, your contributions or money that you

put in is all after tax.

Then, whenever you go to pull that money out all the interest in the earnings that have

accumulated from your contributions are completely tax free as long as you use those towards

your kid's college education.

Now that's important.

If you end up pulling that money out for something other than college tuition or college-related

expenses, you will be taxed and penalized on the interest earnings.

But remember your contributions, the money that you put in are all after tax, so you

can actually pull that money out at anytime and not incur any tax or penalties.

If that sounds familiar it is very much like the Roth IRA, except this is purely used for

college.

Who can actually put money into it?

Anybody.

You can fund it.

Your parents can fund it.

A grand parent can fund it.

Aunts or uncles can fund it.

That is one of the perks about it is anybody can fund it.

But here is probably one of the most attractive reasons that parents like the 529 college

savings plan: The other tool that you can use is what is called a custodial account.

How that works is you put money into the account.

There is typically a custodian, which is a parent or grandparent.

Then the child doesn't actually get the money until they turn 18 or the age of majority.

Once that child turns 18 they can then take that money from the custodial account and

do with it what they please.

They can spend it on college if they want, but if they want to go out and blow it on

you name it, they can do so.

What makes the 529 so attractive is that you're always going to have an account owner and

that owner can be a parent, it can be a grandparent, it can be whoever, but most importantly it

is not the child.

The child is then the custodian of the 529 plan.

Once the child reaches the age of 18 within the 529 plan they are not in control of the

money.

That owner, which is typically the parent, is still in control.

With me, how I set up our 529, I am the owner and once my first son turns 18, if he doesn't

want to go to college and wants to pull that money out and do with it what he pleases,

guess what; it is not an option.

I am in control of that.

That is one very, very attractive feature, that you'll always have your hands on that

money to where your child can't make any rash decisions and go out and blow that money,

especially when you have been saving it for the last 18 years or so.

That also brings up another question.

What happens if my child doesn't go to college?

Do I just lose that money or how does that work?

As a reminder, you can always pull out your contributions so the money you put in can

always come out.

The interest or earnings that have accumulated over that time though will be taxed and penalized

if you don't use it for college.

One way to get around that is if you have, say, two children.

You could actually transfer the money from the child that didn't go to college over to

the other child's name where they can use it for their bachelor's degree, master's degree,

doctor's degree, whatever.

You also have the ability to transfer it over into a close relative, so if you have a niece

or nephew and want to transfer it over and your close to them you can also do that too.

Another common question I get is: What happens if my child receives a scholarship, whether

it is an academic or a sport scholarship?

How that works is this; let's say they get a $10,000 academic scholarship and you've

got $10,000 in your 529 college savings plan.

Are you going to be taxed and penalized for pulling that money out?

No.

Whatever the scholarship amount is, you're allowed to withdrawal that from the 529 college

savings plan tax and penalty free, so that way you can save for your kid's college and

not have to worry if they do get that scholarship that you've been saving for nothing.

That is one of the little benefits of the 529 college savings plan.

What are the different types of the 529 college savings plans?

There are actually two different types.

There is the prepaid tuition, and there is also the savings plan.

I will say that the most popular option that I run into is the savings plan, but let me

first quickly address the prepaid tuition.

The prepaid tuition is exactly how it sounds.

You are buying tuition based on today's dollars to pay for at a later time.

How you determine how much you're paying depends on the age of the child, the type of institution

you think the child is going to go to whether it be a junior college, a state college or

a private university, etc.

That is what makes the prepaid tuition a little bit difficult because, let's say you want

them to go to a private university, there is a different rate scale of how much you

have to pay per month based on that.

The few times I've come across that it is a pretty hefty penny to have to commit to

to do the prepaid tuition.

Double check with your state prepaid tuition plan to find out how much exactly you have

to pay if you want to go that direction.

The more common and more popular method is the 529 savings plan.

How that works is there is no commitment so you can put in $250 today and never fund it

ever again, or you can contribute so much per month.

You can basically do it anyway that you want.

Also if anybody else wants to add money into they can as well.

Let me give you a quick example of how we use it in our own lives.

We opened up the college 529 plan for our first child.

We started funding it and put a couple hundred dollars in the beginning.

We were then putting in $50 a month just to add to it.

Then every time we had a birthday or Christmas or some type of holiday where our kid would

get money, instead of going out and buying more toys that he did not need, we would just

put that into our college savings plan.

So that has just been a really easy and quick way to truly boost our college savings for

him for going for college.

We are doing the same thing with our second son, and we will do the exact same thing with

our third son.

Those are just some of the common reasons why you might want to consider the 529 college

savings plan for saving for your kid's college.

If you want more information, head over to the blog, goodfinancialcents.com.

I have more information on the 529 plan and the other savings plan that are available

to you.

Thanks for stopping by, and we'll see you next time.

The opinions voiced in this material are for general information only and are not intended

to provide specific advice or recommendations for any individual.

To determine which investment(s) may be appropriate for you, consult your financial advisor prior

to investing.