Higher Education Savings Plans Essay

2677 words - 11 pages

Higher Education Savings Plans

Abstract

     This paper is about the Section 529 higher education savings plans that allow family members to receive certain tax breaks while investing for a child’s higher education. The data used in this study is the historical rate of return on a Connecticut 529 plan versus the benchmark, the S&P 500. The time period covered was the inception of this plan starting in 2002 up to the start of research on this study, the end of September, 2004. The tests show that although this particular 529 plan offers tax benefits that could help in investing for higher education, that this particular plan failed to outperform the market during the period observed. Therefore it is my conclusion that there are better investment options on the market to invest in a child’s higher education than this Connecticut 529 savings plan. This study may lead to further observation of other Connecticut 529 plans as well as 529 plans managed nationwide to figure out if 529 plans are as effective as advertised.

“529” college plans have become greatly debated in recent years as a tool for investing for college. The plan, which takes its name for the provision of the tax code that sanctioned them, is a college savings account which allows parents or grandparents to give gifts to children that will be later used to obtain a college education. Although some 529 plans have been around since 1988, the Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to Section 529, most of which became effective in 2002. These changes offer substantial tax benefits to families seeking to finance the cost of college expenses. 529 plans offer families, regardless of income, the opportunity to generate tax-free earnings on funds specially set aside for higher education. These plans, which are run by individual states, can be of great benefit to children by allowing their family members to give money to them in advance to save for college. It can also be detrimental to not only the people who invest but the children who are receiving these gifts. I became aware of these 529 plans by reading “A Random Walk Down Wall Street” by Burton Malkiel. My motivation was to see if these 529 college saving plans are as effective as advertised and to look at the upsides and downsides of investing in them. Since there are tax deductions from investing in such plans for the donors, as well as gains earned and used towards a college education are exempt from Federal taxes, it is definitely an attractive offer.
Such a plan allows an individual donor to contribute up to $55,000 to the account with couples allowed up to $110,000 without paying gift taxes and without reducing estate tax credits (Malkiel, 2003). But as we know, if it does not outgain the alternative, then it is not a worthwhile cause. Plans have a 10% penalty that is assessed on the income portion of any distribution in excess of qualified higher education...

Find Another Essay On Higher Education Savings Plans

The Terribly High Cost of Education

1106 words - 5 pages grandparents—about 40% -- have made Section 529 plans their college savings tool of choice, proving the benefits of tax-advantaged withdrawals”. (“Grandparents saving for college” Investment News 17 Mar. 2014: 0026. Web. 25 Mar. 2014.) The reasons grandparents are assisting with the high cost of education is because they know the value of a college education. Grandparents want to leave a legacy for their grandchildren, citing an appreciation for the value

Comparing George Bush and Al Gore

868 words - 3 pages Comparing George Bush and Al Gore George Bush has seven principles of reform, only four of which I will elaborate on, for a better quality education in our nation’s schools: (1) Achieve Equality; Just as Bush is closing the achievement gap in Texas, he plans to do so across the states (2) Promote Excellence; Bush believes in clearly defined standards of basic skills plus crucial knowledge. The states should devise tests to ensure that the

Newlyweds and Financial Planning

1036 words - 5 pages you investment proposals with higher returns. The newly married couples should also save for the prime events of their life such as for the initial expenses of the birth of the first child, his hospital expenses and his primary education, etc. Regular saving should continue on. Live within security cover The newlyweds should have their life insurance also, because, liabilities increase suddenly. Your life partner has now decided too, to share

Individual Retirement Accounts Analysis

1112 words - 4 pages . In addition empirical evidence proves that 401k plans at smaller firms carry significantly higher expense ratios due to the costs associated with ERISA compliance. This means that employees lose yield by investing in costlier 401k plans and the negative effect is amplified by the lower contribution limits. If limits were raised employees could reap the rewards of higher yields, lower costs, and higher economic benefit by reducing opportunity

Moldova’s Economy

1993 words - 8 pages absence or inadequacy. Capital was thus expected to flow from rich to poor countries since it seeks higher rates of return, thus convergence. Some policies Moldova can adopt if they are to successfully attract foreign savings could be the following: The country could make more efforts to liberalize the financial sector, making it more open to growth and reform rather than allow stringent cultural or other restrictions to run it with no progress. This

Proposed Plan for Resolving the Housing Crisis in America

2197 words - 9 pages -ranging plethora of topics, but in regards to buying a house specifically, there will be three main pillars: the importance of a savings account for emergencies, the importance of living by a budget, and a more expansive area of loan and interest education. The education of the masses must start early on for many reasons. One is that by the time most citizens are old enough or financially established enough to buy a house, their spending

tuition

2300 words - 9 pages , “These plans let you purchase contracts that lock in tuition rates at state colleges and universities.” The third way is Education Savings Accounts (ESAs), “Education Savings Accounts let you invest in mutual funds, exchange-traded funds or other investments for your child’s education.” The next way is Vanguard’s Education Resource Center, “You can use the money for primary and secondary private school tuition along with college expenses.” The

A University Degree is a Good Investment

2577 words - 10 pages College,” which is now renamed Harvard University. College began as an institution that only the very wealthy puritans would attend. Since then thousands of universities have opened and offer many different fields to pursue. From law schools to technical institutes to community colleges, there are a variety of higher education options. Since the mass development of universities, it has become more traditional for people of all social statuses to

The graying of Japan

1055 words - 4 pages don't want to get married? Seventy-fivepercent of Japanese women in their twenties support a concept called "NewSingles." They are saying "I would like to enjoy the single life without worryingabout marriage." Only 50% of the men support this idea. So, in other words,even when Japanese men want to get married, Japanese women may not.Another major factor behind this change has been that more women arereceiving higher education, living in urban areas

Financial Issues Article Review – Explaining Increases in Higher Education Costs

1597 words - 6 pages Financial Issues Article Review - Explaining Increases in Higher Education CostsIntroductionSince the late 1970s, annual costs at four-year colleges have risen three times as fast as inflation, and, with savings rates dropping and state aid to higher education being cut, students and their families have been forced to take on ever more debt in order to receive higher education (Surowiecki, 2011). The rapid increases in higher education costs

Personal Finance and Investing

4523 words - 18 pages cost effective. An Everyday Online Account will pay a higher interest rate on your deposit for the life of your account. (Appendix B: Everyday Online Savings Account)5.4Sub AccountA Sub Account is an additional savings account attached to an Everyday Savings Account allowing you to earn high interest. By attaching to an Everyday or Online Account, Sub Accounts allow you to instantly transfer funds between both bank accounts. (The online

Similar Essays

How To Beat Rising Education Costs

1577 words - 6 pages account, which is not accessible until the child reaches a designated age. This type of savings account will eliminate any temptation to spend the money on something besides college.Prepaid college plans are another option. "Prepaid Education Arrangements (PEAs) give families the opportunity to pay for all or part of a public in-state education at present day prices (College Board, 2008, Para. 1)." By participating in a prepaid college plan parents can

A Safer Approach To Retirement Planning

998 words - 4 pages years. Then as a person grows in age, education, and financial income, increase the savings and maintain the same level of living without adding unnecessary spending. This does not mean to live so tight that there is no room to take trips or have fun times, but it does mean monitoring what is affordable and sticking to the retirement plan. If a person who makes around $25,000 a year were to save 10% of his or her annual income from the age of 20

Fighting Rising College Tuition Costs Essay

2341 words - 9 pages designated beneficiary (usually the child to which the money is being saved for) will greatly benefit from this. A 529 plan is offered by each state by the Internal Revenue service. Wondering how the 529 plan works? It is simple. First there are two types of 529 plans. The first is a prepaid tuition plan, also known as guaranteed savings plans. This type of plan may be administer by the states or place of higher education, and is paid out as the

The Economic Problem Of Population Ageing

1252 words - 5 pages increased social security taxes and reduced public expenses. Higher tax revenue enables government to continue support more spending. Take Britain for example, tax paid per capita account for total income individuals up to 40%. Government increase spending on the health of the residents and the construction of public facilities for the elderly. Additionally, reduction in the number of children save expenditure on education in many countries