529 Savings Plan: Does Backer Offer the Best?

It's never too early to start saving for your child's education.  And luckily for you, you can start saving in a tax-advantaged account as soon as today. How?  You say?  With what is known as a 529 savings plan. 

529 savings plans are one of the best savings accounts you can open when it comes to your child's educational future.  Mostly, because of the tax benefits that come with these plans.

I mean, if you save just $25 a month for the next 16 years, you'd have almost $10,000 saved for mini me's college assuming an 8% return.  And it would all be tax free!

Imagine if you were able to put in twice as much.  You'd have just about $20k in the bank!  And what if, it wasn't just you saving but family and friends as well.

Well that's what Backer wants to encourage so that the onus of preparing for your child's future don't rest solely on your shoulders.

Let's take a sec and learn about what these 529 savings plans are and how they can help you save for your child's college.

Then we'll also check out Backer and see if they would be a good fit for you and your family.

529 Savings Plans: What are they?

529 savings plans are tax-advantaged accounts used to save towards future education.  Also, known as qualified tuition plans, these plans are sponsored by the state or educational institutions.  

As such, the tax advantages may vary by state.  Some states will allow for contributions to be deductible from your state income tax (not federal).  Woop woop!  But be sure to check for any restrictions or requirements.

Money contributed to 529 savings plans is allowed to grow tax free.  And when withdrawn for educational purposed it is tax free as well!  

Of course, if it is withdrawn for other purposes, there is a 10% penalty and you will have to pay taxes on it.

There are two types of 529 plans:  Prepaid Tuition Plans and Education Savings Plan.

Prepaid Tuition Plans

These plans are exactly how they sound.  You may choose to pay for units or credits for the college of your choice in advance.  This means you would prepay for these credits at the current price.  So as the prices to attend the university rises you will be saving on the difference.

The downsides of this plan, however, are numerous.  For instance, this plan cannot be used towards books, room and board, or anything besides tuition. Furthermore, it cannot be used to cover expenses for K-12 education.

Also, if your child decides to go to a school not covered by this plan, then you may not actually realize any savings at all from all your prepayments.

The same goes for if the educational institution goes bankrupt or has financial troubles.  Consequently, if your prepaid tuition plan is not insured, you could end up losing all of it.

What's more, some states may have a residency requirement for you to be able to take advantage of this type of savings plan in the first place.

Education Savings Plan

Education savings plans are a much less restrictive than their prepaid counterpart.  

What makes this 529 savings plans great is not only are they tax-advantaged accounts but they are also investment accounts.  This means that the money you contribute to this account can take advantage of the stock market to grow exponentially.

And all of this growth would be tax-free!

Once the account is opened, you can choose which ETFs, mutual funds, or other offerings you'd like to invest in.

This savings plan can then be used for qualified educational expenses such as room and board, tuition, and textbooks.  Also, you may use this account to pay for your child's K-12 education at any public or private school.

Best part.  You can use these savings to pay for almost any college or university in any state and even some international universities as well.

The downside is that while this savings plan gives you the opportunity to grow your money exponentially, you may also lose some or, potentially, all of it.

You are investing in the stock market after all and as such you should be aware of the risks.

In addition to that, there are restrictions such as you may only use $10,000 per year per student when using it for K-12 grade education.

Note: This article will focus on this type of 529 savings plan.

How can I use my 529 savings?

Traditionally, you could only use 529 plans towards college tuition and books.  But in the recent years, its uses has been expanded.

Here's a list of ways you can use your 529 savings plan: 

* student must be enrolled in the college at least half-time

There are however some limitations on the amount you can withdraw for certain expenses.  For example, for K-12 educational expenses there is a $10,000 annual limit per child.

And for student loan repayments, there is a $10,000 lifetime limit but that is per borrower and you can even use it for the beneficiary's brothers or sisters.

Of course, there are some expenses that do not qualify for tax-free withdrawals even though they may seem like that should.  And that is health insurance and transportation costs.

The only way you'd be able to get around this is if the college or university has it written into their fees as a requirement for attending their school.

What are the benefits of 529 plans?

There are numerous benefits to using 529 savings plans for your children. The first of which being the ability for your contributions to grow tax free and for your withdrawals to be tax-free as well.

There are no, or low, minimums to open up a 529 savings plan so it is very easy to get started saving for your child's future.  

Additionally, you can use this savings plan for any colleges or universities in-state, out-of-state, or overseas.

There are no age restrictions meaning even grandma can use one to go back to school.  And it can be used to pay for a variety of educational expenses including room and board which is probably the most expensive expense after tuition.

Furthermore, these savings plans are quite flexible.  Should one child choose not to go to university, you can easily transfer it to the other or use it for an apprenticeship program.

What's more, a 529 account does not come with the huge negative affect on your child's application for financial aid like other savings accounts.  

Plus, opening one can be a good opportunity for you to get your child involved in their education and to teach them the importance of saving and investing.

Are there downsides to 529 plans?

The biggest problems that parents face when using savings accounts such as UGMAs or UTMAs is that it can have a huge negative impact on your child's ability to qualify for financial aid.  

That is because with custodial accounts such as a UGMA or UTMA, the accounts are actually in your child's name.  FAFSA sees this as income and so it can disqualify your child or, at least, severely hinder your child's chance of getting financial aid.

However, unlike the custodial accounts, 529 savings plans are, usually, in the names of the parents.  So, when doing the FAFSA, it will show up on the parents' side of things.  Therefore having less of an impact on your child's ability to get aide.

Be aware though, should a grandparent or someone other than the parents hold it in their name, such contributions can significantly reduce the students eligibility for need-based financial aid.

Another downside to 529 plans is that your investment options are limited. You are only able to choose from the funds your brokerage or advisor designates for 529 plans.

Not only that but you don't have the freedom to change where you invest your money as you wish.  Most plans only allow you to change them twice a year or when you change the beneficiary.

When you invest in 529 plans, it is most definitely for the long-term strategy.

What is College Backer?

College Backer, or Backer as it is now called, has the auspicious title of being the worlds first social college fund.  Their mission is to revolutionize the way we save money by making saving for college a social venture.

Instead of just us trying to save for our child's future alone, we can actually get support from our family, friends, and community.

You probably have heard of the old African proverb: It takes a village to raise a child.  

Well, believe it or not, it does.  And that is what Backer allows you to take advantage of when you are saving for their educational future.  Your village!

How can Backer help you?

Backer can help you save more for your child's education.  With college backer, parents have been able to save 40% more than they normally would.

Why?  Because of the contributions made by friends and family.  Of the people who use Backer, a whopping 37% of their assets come from gifts made by friends and family.  

That's a lot considering it would usually just be you, the parents, footing the entire bill.

Backer makes it easy for your community to contribute to your child's education plan.  Many give money for birthdays, Christmas, and other celebratory occasions. 

And it can all be done easily online.  Once you head over to their website and open your account, you can begin to customize your child's gifting page.  Then copy the link and send it out to family and friends. 

It's just that simple!

Another bonus with Backer is their cash back rewards program.  So when you shop with partnered brands, you'll get cash back that will help you save even more.

Furthermore, with Backer, you get a built in robo-advisor that can help you in selecting which funds to invest your money depending on your baby's birth date.  

They also give suggestions based on risk tolerance, the level of fees associated with the investment, the reputation of portfolio managers, as well as any other personal information you provide.

Also there are no minimums so opening an account is easy.

You can even open an account before you have your baby.  Then when the baby is born you can easily change the beneficiary over.

Fees and Pricing 

With your Backer 529 savings plan, there are no hidden fees and your gifting page and cash back rewards programs are free.  

The first month is also free so that you can decide whether Backer is right for you.  Afterwards, you are charged a fee monthly to maintain your account.

Backer's fees are interesting because they let you choose your own fees.  Crazy?! Right!  Here's what I mean.  

For your monthly fee you can choose to pay anywhere from $1 to $10 per month.  And because their mission is to make college affordable to every family, you may even be able to get out of that!

One good thing to note about monthly fees is that it is a fixed rate that won't increase as the amount in your account increases.  This is good because you won't be losing more of your money as your account increases as is the case with those accounts that take an annual percentage. 

Furthermore, this monthly fee covers the entire family so if you open up more accounts for your children you won't have to pay more.

The 529 plan fees, or expense ratios, depend on the plan and vary between 0.16% and 0.18% a year.  These fees are much lower than other direct-sold and advisor-sold 529 plan fees which can range, on average, from 0.35% (direct-sold) to 0.89% (advisor-sold).

Comparing Costs

When you get your 529 savings plans through other brokerages or financial institutions, you should be aware that your costs can go up dramatically. Especially, when you get an advisor-sold 529 plan.

The additional fees can include an upfront sales charge, an annual account fee, and assets under management fees.  And that is in addition to the underlying expense ratios of the funds you are investing in.

Let's check out some of these fees and some companies that offer 529 plans below.  Of course, do your own research as well, as this does not include even a tenth of what's out there.

If not with Backer, how else can you open start a 529 plan?

You can start a 529 directly online from most financial institution.  Every plan will be different with various fees associated with the account and investment options.

Remember, starting your plan through an advisor will bring additional fees. But you can always start one yourself directly online.

Be sure to check the plans rules, restrictions, and fees to make sure it is what you want.

All in All

With the ever rising costs of higher education, it is a must for everyone to start planning (and saving!) for their child's future education.  

One of the best ways to do this is through 529 savings plans as they are tax advantaged and have minimal effects on your child's ability to receive financial aid.  

Backer makes opening a 529 savings account and maintaining it simple, easy, and fun.  And I love the community aspect of it.  Not to mention, their fees just might be the lowest around.

But don't take my word for it.  Check it out for yourself.  And don't forget to do your own cost-benefit analysis.

If you've heard of any other good companies or brokerages for 529 plans, be sure to let me know in the comments below! : )

Happy Saving!