If you have kids and saving for their college is on your mind, I am sure you have heard of a 529 College Savings Plan. A 529 plan (named from the Internal Revenue Code Section 529) can be a great tool to help you save for those college years. Do you know there are 2 types of 529 plans? The 2 different types are a Pre-paid plan and a Savings Plan.
Pre-Paid Plan
When I was young (and way less financially literate!), I chose the Pre-paid plan for my daughter. We lived in sunny south Florida and it had an affordable monthly payment that would fully pay for her 4 years of school at any public Florida school. Seemed too good to be true that a young, single mom would be able to pay for her daughter’s full college experience within her budget. For me, it was too good to be true.
We moved away from Florida and my daughter wanted nothing to do with a university in the state of Florida when it was time for her to start making her decision. Luckily, we did not lose any money, but we did not gain any more than if that money were sitting in an interest-bearing savings account. I started the plan when she was about 7 and made my monthly payment until she was 18 and heading off to school—in Seattle. You know what is even worse? Not only was the rate of return zilch, but we could not even take a lump sum. We were required to take the money out by the credit hours she was taking, and the great state of Florida includes ALL colleges when deciding what that hourly rate is. So, when you account for community colleges in the entire state to get your average rate, that is why we had zero return.
Savings Plan
Looking back, I would have done things differently. Had I chosen the 529 savings plan where the money would have been invested, the return would have been so much better. I also would not have been so naïve to think that my daughter would not have her eyes set on any school outside of Florida-after all, she is my kid, and I do not like staying put either!
There are lots of things to consider when saving for college and choosing a 529 plan, including what state you live in, because there may be tax breaks now in addition to your tax-free growth (if used for qualified tuition expenses). I am here to help and please use my story above as a reason to ask more questions and know what you are getting into.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.
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