Investments And Tax Deferred Plans
What makes 529 plans so attractive is that the account is only taxed when money is taken out for college. And the amount taxed is based on the beneficiary's income - not the donor's (usually a parent, relative or custodian).
The plan is managed by the State treasurer and invests in federal U.S. Department of Treasury funds. Those investments currently have a 5 percent annual interest rate and may not be as rewarding as the 10 percent return in a mutual fund, but they are less volatile.
Moreover, when the tax advantage is added in to the annual investment, the interest of 5 percent is inflated to 7.25 percent,
College Vision works as follows: A parent and a College Foundation adviser determine the cost of college for the child based on what year the child will enter school, living expenses and whether they will be attending a public or private university.
Let's say the savings target is $100,000 for a public university and the child is 5 years old.
Parents would have 13 years to pay into the savings plan before the child enters college, and they also have four years to invest in the plan while the student is in college. But what if the fund has only earned $70,000 instead of $100,000 after 13 years? The North Carolina 529 plan allows for an optional loan component to kick in that would provide the needed $30,000.
What makes the loan option attractive is that the loan is a subsidy to the amount needed and could be repaid over the same period as the original term of the investment, in this case, 13 years.
So you're looking at $100,000 to be paid 13 years before college, four years while the child's in school and 13 years after school, that's 30 years,. That makes payments to average $270 a month.'
What's more, the loan part of the plan has the same annual interest as other federal school loans.
The stipulations on 529 plans are comparable to other college funds and can be used for any accredited post-secondary school in the nation.
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