Outline
The article investigates analysis of College 529 Savings Plan and the recommendations for choosing the investment option.
Introduction
Savings have become a significant part among investors the world over. Instead of spending funds, it is more worthwhile to invest the same for future use. People like to invest in those funds which help them to earn better returns and also additional benefits like tax savings, capital accretion, regular interests, loans against investments, etc. There are varieties of funds in the market. So while investing in a particular fund a thorough knowledge is required about the product and its features and benefits. College 529 savings plan is one among them and it has become very significant nowadays among the families as it helps in investing to meet the future education needs of their children. This assignment is mainly to identify which plan to choose for investing and the economic variables associated with it.
Analysis of 529 Plan
We can assume that the age of the child be now 3 years. So only after 15 years he will be joining in the college and the expenses he has to meet in future could be in the following way:
The total college cost will be $262,101 and have to pay $8,789 as annual installment with the following assumptions:
- The child will join a college that currently costs $25,000 annually.
- The college time period is 4 years on full time basis
- The parents wish to meet the savings when the child begins college education.
- Expected college cost will increase by 6% each year.
- Expect to earn 7% after tax each year.
Returns statement in 529 Plan
The following table shows the return at the end of each year of annual contribution of $8,789 over 15 years while investing in 529 Plan.
The following table helps to compare 529 Plan with other plans like Coverdell Education Savings Accounts, Qualifying U.S Savings Bonds. Coming to the question of investing $100,000 for child’s education, at 7% returns after tax, this would fetch.
External influences
Since the savings plan is linked to the stock market, it is influenced by stock market conditions, and the general economic scenario of the particular state in which the investment is proposed to be carried on.
Since each plan have different characteristics, it is advisable to make a thorough analysis of each plan. You have to consider even the smaller details of the plan. In some plans, eligibility condition has more importance while some others have additional fees for non-residents. One of the peculiarities of the plan is that funds for 529 tuition savings schemes are allocated only for qualified education expense. (The good the bad and the inconsequential: An introduction to 529 plans, 2009).
Recommendations
By comparing the three plans – 529 Plan with Coverdell Education Savings Accounts and Qualifying U.S. Savings Bonds, it could be concluded that 529 Plan will be suitable for investment purposes.
A 529 Plan is usually designed by specific countries and each 529 Plan differs from one country to the other. 529 plans can be categorized as savings plan and prepaid plan.
- Savings plan: These plans work like mutual fund. The plan offers different options and investor can choose the best one from it. The investor will receive the benefit as per the performance of the schemes. Sometimes it will go up and sometimes there may be a decline. These schemes are of two types; direct sold savings schemes and broker sold savings schemes.
- Prepaid plan: Under this, one can prepay either the full amount or part of it. There is a separate prepaid scheme for private college. Prepaid plan are of two types: Contract Plan and Unit plans.
Conclusion
New investment opportunities like 529 College Savings Plan helps to meet the future education requirements of the children. The tax rate could be determined by the investor and the return depends upon the tax rate. So if one invests $100,000 in 529 College Saving Plan with an interest rate of 7% after tax, then the return after15 years will be $107,000. As there is age based investment plan there won’t be any loss while stock market downs because as the child becomes close to join the college the selected account will be switched over to lower risk options money market or stable value funds. (Research and compare 529 plans, 2009).
References
Research and compare 529 plans. (2009). 529 PLANS. Web.
The good the bad and the inconsequential: An introduction to 529 plans. (2009). Scholarships.com: An introduction to 529 plans. Web.
Tools and calculations: Compare savings options. (2009). Savingforcollege.com. Web.
World’s simplest college cost calculator. (2009). Savingforcollege.com. Web.