Two people on the verge of becoming parents will ask many questions while waiting for impending parenthood. What will we name the baby? Who will the baby look like? Where will we raise the baby? Will the baby play sports, or do theatre? What will the baby be when he/she grows up? Will the baby go to college?
College. COLLEGE! Honey, how on earth are we going to pay for college?!
Paying for college, for many parents, is one of the biggest stressors of parenthood. It’s right up there with potty training and getting their kid to eat its vegetables. When tuition prices rise each school year, and when the average annual tuition in the United States is close to $34,000, it’s no small wonder we’re all stressed. Many young parents are also carrying the debt of their own college education when they welcome their first child into the world. With that, the cost of a mortgage and utilities, and now the added cost of a new baby, how on earth can new parents even fathom saving money for their new bundle of joy’s future college expenses? It’s not easy, but it is doable. Thanks to the multitude of savings plans available to just about anyone.
The most popular, the tax-advantaged 529 plans, have been offered nation-wide for over 20 years. These plans are designed to help you set aside money for your child or grandchild, but you can also create one for someone with whom there is no familial relationship. There are currently over 100 different 529 plans in the United States; in Maryland, there are two types of 529 plans: investment plans and prepaid tuition plans.
Investment Plans give you the ability to invest in any number of investment portfolios and a varying number of mutual funds. With investment plans, you can decide how much you want to contribute, how often, and in which type of portfolio. The money you invest in these types of plans can help cover the costs of a number of education expenses: tuition, fees, room and board, course-specific fees, books and other supplies.
Prepaid Tuition Plans allow for the pre-purchase of tuition based on current prices, with one of the main benefits being the opportunity to evade any future tuition hikes. In Maryland, the prepaid tuition plans are designed to pay for tuition and other mandatory college fees for any public college in the state. In some cases, however, the money can be used at private or even out-of-state colleges (assuming those states don’t have a different structure to their prepaid tuition plans).
There are obvious pros and cons between the two types of Maryland 529 plans. But what might not be so obvious right now is why 529 plans are so much more popular than other college savings plans out there. What are the pros and cons of having a 529 account, whether it is an investment or prepaid tuition plan?
| Pros | Cons |
| The money you invest in a 529 plan will grow in the account tax-free, as long as the distributions are used to cover qualifying expenses. | It has the potential to negatively affect financial aid awards. |
| There is no upper age limit, unlike with some other savings accounts, which may only be available for use until the beneficiary is 30-years-old. Leftover expenses can also be transferred to another beneficiary. | Limited choices. Many 529 plans are controlled by a plan manager who develops an investment plan that you will stick to. And with prepaid tuition plans, the beneficiary is limited to the college or institution that the plan was created for. |
| Grandparents or other relatives wishing to give a large, lump sum of money to their grandchild orrelative,can do so in a 529 plan. |
Saving for college can be a daunting task. It can be frustrating at times with the constant worry that you won’t save enough or in time before your bouncing bundle of joy starts his or her first day. But you can rest easy knowing that there are small steps you can take now to lessen the burden later. If you’re worried or confused or still have questions about what is right for you, consider calling a tax advisor (to assist with the tax benefits) or a financial advisor. It’s also important to remember that financial planning such as saving for college is one of the many pieces of a larger puzzle you’ll need to consider when doing your estate planning. The attorneys of Ferrante and Dill’s Estate Planning and Elder Law group can help you plan a better, smarter future for you and your family. Drop us a line today at (410) 535-6100 or send us an email at info@ferrantedill.com.
Disclaimer!
This blog post that is published by Ferrante & Dill is only available for informational purposes and should not be considered legal advice. By viewing these blog posts, the reader understands there is no attorney-client relationship between the blog publisher and the reader. The blog post should not be used as a substitute for legal advice from a licensed professional attorney, and we recommend readers to consult their own legal counsel on any specific legal questions concerning a specific situation.
