College Investment Plans - Basics
College Investment Plans, also known as 529 Plans, are designed to help families save for college. The two types of 529 Plans are College Savings Plansand Prepaid Tuition Plans. 529 Plans are considered to be good investment vehicles to help parents and Teenvestors plan for college education. Under these plans, money is invested in a state-sponsored fund designed to help save for college tuition (and associated expenses such as room, board, books, and supplies).
Most plans are open to both state residents and non-residents, and the assets in the funds can be used to pay for education expenses at virtually any college in the country.
Earnings in college tuition savings plans are not subject to federal tax, and in most cases, state taxes, as long as you use withdrawals for eligible college expenses, such as tuition and room and board.
In many College Investment Plans, you have a choice as to how your money is invested but there are no guarantees about the amount of money your investments will make or about the tuition payments to a public institution in your state. However, College Investment Plans are great for Teenvestors because they can invest as little or as much as they want in order to save for college. The features of these plans are as follows:
Direct-Sold Plans vs Advisor-Sold Plans
Of all the available 529 plans offered in the 50 states, roughly half are Direct-Sold Plans and the other half are Advisor-Sold Plans. As the names imply, a Direct-Sold Plan is a 529 plan that you purchase directly. An Advisor-Sold Plan (sometimes referred to as a Broker-Sold Plan) is a 529 plan that is sold through a financial advisor or broker. The advisor through whom you are purchasing the plan can help you find the type of plan that best suits your needs. However, Advisor-Sold Plans come with higher fees than Direct-Sold Plans.
Due to their relative affordability, Direct-Sold Plans are the way to go if you are willing to perform extensive research into the types of 529 plans that are out there. Every state has at least one 529 plan (and you can buy a given state's 529 plan even if you are not a resident of that state, although you may miss out on the tax benefits...more on that later), so it is essential that you spend time comparing plans to find the one that suits you best.
Each state has its own investment options but what a lot of the plans have in common is that these options can change, as the person for whom the plan was stabled gets closer to college age. Such plans whose composition can change with age are called age-based plans.
Your Funds Are Moved Around
In some state college investment plans, your investments are automatically moved from aggressive (risky) portfolios to more conservative portfolios, depending on the age of the person for whom the plan was established. In these plans, as the child approaches college age, the money in the plan is moved into more conservative investments.
You Can Revise Your Investments
Some plans allow you to revise your investment options. These plans allow you to move from aggressive (more risky) investments to more conservative investments as the college candidate approaches college age. An example is one where a Teenvestor opens a College Investment Plan at age 14, which means he has only about 3 years before he needs the money for school. Given this short time horizon, he can move the money into conservative College Investment Plans that invest only in low-risk investment such as Certificates of Deposits or Money Markets.