Posted by LWM Team on Wed, Feb 10, 2010
Most parents dread the thought of paying for their children's college expenses. As educational costs skyrocket from one year to the next, parents find themselves burdened with the unsavory task of trying to plan for their child's financial future while navigating through a long list of unknown variables. Fortunately, the government has created a 529 Investment Account for just this situation. A 529 is useful for financing a variety of education related expenses such as room and board, food, books and of course tuition.
In many ways a 529 investment account is similar to a 401(k) however instead of saving for your retirement you are saving for your children's college education. In fact, a 529 carries many of the same advantages and disadvantages of a 401(k). For instance, with a 529 investment account you are able to deposit a portion of your yearly income pre-income tax into the account. For this reason a 529 account may be particularly attractive to those individuals who are keen on managing their investments with a granular control.
The major downside of a 529 investment account is the fact that it requires you to make plenty of assumptions upfront and risk potential financial penalties should your assumptions be incorrect. Should you begin saving for an Ivy League education and your child only attends a state college you'll quickly find that there is much more money left in the account than necessary. In this event you will be hit with large financial penalties that vary from state to state when you withdraw your money for non-education related expenses. Not only are the withdrawn funds subject to income tax there is often times a penalty that hovers around 10%.
When used wisely a 529 Investment Account is the best way to help plan for your children's future. They can be a little complex but are well worth the effort considering the financial benefit.