A college savings plan is designed to help parents, grandparents or relatives to save money for future college expenses.
Who it is for.
The beneficiary for this plan is usually a child, grandchild, or younger relative. However, an adult can also open this type of savings plan to save for their own higher education expenses and possibly use the savings plan as a retirement plan later on.
How it works.
Anyone that is 18 years or older can open this type of savings plan. There are several different plans to choose from. Some plans offer a mixture of mutual funds while others offer money market fund options.
Different types of coverage in existence
Basically, there are two different types of 529 plans. They are known as prepaid tuition plans or college savings plans.
Prepaid Tuition Plans:
This plan allows you to purchase college credits, and will possibly cover room and board for future enrollment at a college or university. Your payment plan is based upon the institution’s current fees and what you choose to purchase.
College Savings Plans:
This savings plan allows you to invest your contributions in bond mutual, money market, or stock mutual funds. Your contributions to this plan will cover tuition, room and board, books, computers, and other mandatory fees.
A Roth IRA can be started by a parent but opened in the child’s name once they start earning income. This account can also be used as a retirement plan in addition to a college savings plan. Usually, this account does not allow early withdrawal except in special circumstances such as purchasing a first home, or qualified educational expenses.
College savings plans can be used by anyone that meets the requirements to attend a college or university. Money from thistype of plan can be used to pay for college expenses such as tuition, fees, room and board, computers, and books. As long as money is used to pay for college expenses, the funds are 100% tax and penalty free.