If you are wondering what is 529 college savings plan, then, you are not alone. You’ve probably heard about qualified 529 plans or state-sponsored 529 college savings plans. Congress created Section 529 plans in 1996 and by now 529 plans have emerged as one of the popular ways to save money for college. Section 529 plans are officially known as “qualified tuition programs” under federal law.
A 529 college savings plan or program is a college funding vehicle that has federal tax advantages. There are two types of 529 plans: (1) college funding (or savings) plans and (2) prepaid tuition plans. Although college funding plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them.
(1) Section 529 College Savings Plans:
529 college savings plans let you save money for college in an individual investment account. These plans are run by the states, which typically designate an experienced financial institution to manage their plan. To open an account, you fill out an application, choose a beneficiary, and start contributing money. After this, you simply decide when, and how much, to contribute.
The plan investment managers commonly invest your money based only on the age of your beneficiary (this is known as an age-based portfolio). Under this model, when a child is young, most of the portfolio’s assets are allocated to aggressive investments. Then, as a child grows, the portfolio’s assets are gradually and automatically shifted to less volatile investments to preserve principal. The idea is to take advantage of the stock market’s potential for high returns when a child is still many years away from college, then to lessen the risk of these investments in later years. When it’s time for college, the beneficiary can use the funds at any college in this country and abroad, as long as it is accredited by the U.S. Department of Education.
(2) Section 529 Prepaid Tuition Plans:
Prepaid tuition plans let you save money for college, too, but in a different way. Prepaid tuition plans may be sponsored by states (on behalf of public universities) or by private colleges. A prepaid tuition plan lets you prepay tuition expenses now for use in the future. The plan’s money manager pools your contributions with those from other investors into one general fund. The fund assets are then invested to meet the plan’s future obligations. Many plans even guarantee a minimum rate of return. The most common type of prepaid tuition plan is a contract plan. With a contract plan, in exchange for your up-front cash payment (or series of payments), the plan promises to cover a predetermined amount of future tuition expenses at a particular college in the plan. These plans have different criteria for determining how much they’ll pay out in the future. And if your beneficiary ends up choosing to attend a school that isn’t in the prepaid plan, you’ll typically receive a lesser amount according to a predetermined formula.
The other type of prepaid tuition plan is a unit plan. You purchase units or credits that represent a percentage (typically 1 percent) of the average tuition costs at the plan’s participating colleges. Instead of having a predetermined value, these units or credits fluctuate in value each year according to the average tuition increases for that year. You then redeem your units or credits in the future to pay tuition costs, and many plans also let you use them for room and board, books, and other supplies. A final note to keep in mind: Make sure you understand what will happen if a plan’s investment returns can’t keep pace with tuition increases at the colleges participating in the plan. Will your tuition guarantee be in jeopardy? Will your future purchases be limited or more expensive?
Cash Value Life Insurance based plan provides almost all the advantages of 529 college savings plans while eliminating the disadvantages.
As you can see, Cash Value Life Insurance is a great college savings option for most scenarios. It gives you all the advantages of 529 college savings plans with the added advantage of paying a death benefit should you die prematurely or become totally disabled.
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