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Understanding Private College 529 Plans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Saving for college can feel daunting. Not only are projected tuition rates jaw-dropping — with some projections suggesting that private tuition will cost nearly half a million dollars in 18 years — but it’s also hard to sift through information about the optimal savings plan that’s right for your family’s needs.

If you have children it’s likely you’ve heard about 529 plans, but may be confused about the difference between Private College 529 plans and state-run 529 plans.

In this article, we’re going to explore how these two plans differ. But first, let’s quickly review what a 529 plan is.

What is a 529 plan?

A college savings 529 plan — also called an education savings plan — is a type of investment portfolio specifically earmarked for tuition expenses. When used for education expenses, the earnings from a 529 plan are not subject to federal tax and, in most cases, are not subject to state tax. Besides tuition, the money in a 529 account can be used for expenses such as miscellaneous administrative fees, books and room and board. Contributions to 529 plans are made with post-tax dollars.

A 529 plan can be set up at any time, even before you have children. It’s possible to set up a 529 plan and then name your child as a beneficiary once your child is born. These plans are a popular way to encourage relatives and friends to gift funds to your child’s education. It’s important to note that any contribution over $14,000 made by a single individual (which includes you as a parent) is potentially subject to a gift tax.

Nearly every state sponsors at least one 529 plan and you’re not required to be a resident of that state to choose a plan.

What is a prepaid 529 plan?

Like the name says, a prepaid 529 plan allows for a contributor to use pre-tax dollars to prepay college tuition at today’s prices. These may have limitations by state, residency and type of institution (for example, K-12 tuition is often exempt).

Prepaid 529 plans may cover the cost of tuition for in-state institutions, but they may only cover the “weighted average tuition” or minimum benefit for private colleges and out-of-state colleges, which may leave you on the hook for thousands of dollars to make up the difference. Prepaid 529 plans may also only pay for a certain number of credits.

What is a private 529 plan?

529 funds historically could be used for other types of tuition, while prepaid savings plans were meant for families who were planning for their child or children to attend a state school. Now, there’s the option to enroll in a Private College 529 plan.

Like other prepaid 529 plans, a Private College 529 plan allows you to lock in today’s tuition rates. Created by a consortium of nearly 300 private colleges and universities — including Middlebury College in Vermont, Smith College in Massachusetts and Stanford University in California — the Private College 529 plan sells “tuition certificates.” These certificates are then redeemed at participating schools when a student is ready to attend college. The amount you buy in tuition certificates locks in the cost of tuition at the time you purchased the certificate.

Let’s say you purchase $20,000 in tuition certificates in 2018. In 18 years, your child chooses to go to Middlebury College. Tuition for the 2018-19 school year at Middlebury is about $54,000, so your $20,000 tuition certificate covers roughly 37% of one year’s tuition in today’s dollars. When your child begins college in 2036, your tuition certificates will still cover 37% of a year’s tuition to Middlebury, regardless of how much tuition costs at that time.

Tuition certificates only cover undergrad tuition and mandatory fees (it’s uncommon to cover room and board) and only work at private institutions that are part of the Private College 529 plan. However, the money can be rolled over into a state-sponsored 529 plan or can be refunded. Refunds that are not used for higher education expenses are subject to a tax penalty.

Private College 529 plans and state-run 529 programs: What’s the difference?

For some, the Private College 529 plan may seem too restrictive. Alternatively, the idea of locking in current tuition rates and not having to worry about inflation can seem attractive. If parents and relatives have the means to gift the maximum allowable tax-free gift to a 529 plan on a yearly basis, choosing a Private College 529 plan could add up to a significant percentage of the total tuition in just a few years.

It’s possible to open multiple 529 plans for the same child, and some people find it makes sense to have both a Private College 529 plan as well as a state-run 529 plan. Not only can state-run plans pay for room, board and education expenses such as books and necessary electronics, but some also offer rewards programs and make it easy to roll over a state-run 529 plan to another family member.

FeaturesPrivate College 529 planState-run 529 programs
Tuition ratesLocked in at the tuition rate the day the tuition certificate was purchased.Tuition fluctuates and is subject to inflation. The money invested in a state-run 529 program will be used toward the cost of tuition for whichever year the beneficiary begins college.
FeesNo fees — all fees are paid by member institutions.Most, but not all, state-run plans have fees, which could vary from $10 up to nearly $100 a year.
Investment riskTuition certificates are guaranteed to pay the percentage of tuition purchased, regardless of inflation.A 529 plan is an investment product and is subject to market volatility.
Contribution limitContribution limit is based on the cost of the most expensive five-year tuition of a member institution. For 2018-19, it’s $285,030.Contribution limit varies by state and plan, but contribution caps tend to range between $250,000 and $500,000.
Use of assetsTuition certificates can be used for tuition and “mandatory fees.” Tuition certificates likely can’t be used for room, board and expenses.Money from a state 529 plan can be used for tuition, fees, room, board and other expenses (including laptops), as well as education expenses for grad school.

Tax considerations for a Private College 529 plan

Like state-run 529 plans, Private College 529 plans use post-tax money as contributions, which are not tax deductible. Private College 529 contributions may be subject to gift tax considerations if individuals gift over $15,000 to one individual. However, it may be possible to gift a $75,000 in one lump sum, prorated for five years, to one account. This could be an option relatives might consider for estate planning purposes, as the $75,000 in tuition certificates locks in the current year’s tuition rate.

If a student decides not to enroll at a participating college, the money in a Private College 529 plan can be rolled over into a state-run 529 plan. The potential disadvantage to that option is that the money in the fund will be rolled over depending on the money’s performance in the trust, at a maximum increase or loss of 2% each year. This means that you may have missed out on the maximum potential for growth. Additionally, any earnings could be subject to a tax penalty if you choose to get a refund.

Private College 529 plans and financial aid eligibility

If your child has a Private College 529, how will that affect financial aid? Private College 529s are considered a parental asset, which is assessed at a different weight than a child assets.

A parent must report all the 529 plans they own, even if they’re for younger siblings. You may not be required to report the 529 at all on the FAFSA if a grandparent is the custodian of the 529 or if the 529 is owned by a noncustodial parent.

Bottom line: Is a Private College 529 plan worth it?

A Private College 529 plan may make sense if you have a strong sense your child will attend an institution currently on the plan. If, for example, you and your partner are both alumnae of the same school, you may feel strongly that your child will attend it, too, and feel confident that a Private College 529 Savings plan is the best option for your family.

There’s always the possibility for new institutions to join the program and there’s no need to “pick” a school until your child enrolls in a college. It’s important to remember that enrollment in a Private College 529 plan doesn’t guarantee admission to a school, and the list could prove limiting to certain students.

Some parents like the flexibility of opening a Private College 529 plan as well as a state-run plan to cover all their bases. One thing’s for certain: Whichever option or combination of options you choose, making a savings decision early can provide peace of mind for the future.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anna Davies
Anna Davies |

Anna Davies is a writer at MagnifyMoney. You can email Anna here

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Investing

4 Things to Know About Equity Funds

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Ever feel like a huge part of the investing learning curve is mastering the terminology? Between a dizzying array of acronyms, range of investment types, and brokerage marketing copy, it can be tough to figure out the one question you likely have: How will this investment potentially affect my money?

Equity funds are one such investment type that can be confusing for a beginning investor. Below, learn what an equity fund is, how it works, and what to consider before including equity funds in your investment portfolio.

What is an equity fund?

An equity fund, also known as a stock fund, invests primarily in equities (aka stocks) rather than bonds or other assets. Through an equity fund, you own shares or fractions of shares of stocks in an array of companies.

The term encompasses a broad category of funds and, chances are if you have a 401(k), you may already be investing in equity funds. According to 2015 data from the Investment Company Institute, on average, 401(k) investors in their twenties had 28% of their 401(k) assets invested in equity funds.

Equity funds often focus on a specific theme. Some funds may focus on investing in technology companies, while others may invest in stocks of companies within a particular market index.

While you can choose which equity fund to invest in, you can’t pick and choose which publicly traded companies the fund invests in. Like all investments, these funds carry risk. But equity funds attempt to minimize these risks through portfolio diversification.

What kind of equity funds are there?

There are many types of equity funds and brokerages offer a range of options. There is no “right” equity fund to invest in, and which one you choose depends on your growth goals, your timeline, the distribution of your other investment dollars, and even your interests. Here are some equity funds and terms to consider.

Index funds

Index funds track the performance of a set group of companies within a major market index. For example, an index fund that tracks the S&P 500 provides the investor exposure to the 500 publicly traded companies within the S&P 500 list and will broadly follow the movement of the market.

These index funds are divided into sizes — you may have seen the terms large-cap, mid-cap, small-cap. “Cap” refers to the market capitalization of a company. Large-cap funds, like the S&P 500, are filled with large, publicly traded companies with names you likely see and use in everyday life, including Amazon and McDonald’s. Meanwhile, small-cap funds have smaller market capitalization and newer companies. In general, the thinking goes that the smaller the cap, the riskier the investment — and the greater chance for reward.

International and global funds

These funds specialize in international investments. International investments can diversify a portfolio as well as give an investor exposure to emerging markets and international growth. These funds may be based on region, an index fund based on global markets, or may be focused on emerging markets.

Sector and specialty funds

These funds are based on broad categories of publicly traded companies, such as healthcare, real estate or information technology. Choosing a specialty fund can diversify your overall financial strategy. Some sector funds may perform well despite dips in the market — for example, utilities and healthcare are still necessities in a recession. But because sector funds don’t necessarily follow market predictions, these funds are sometimes seen as riskier than other equity fund options.

No matter what type of equity fund you choose, it’s important to know how your account is managed. There are two options: Actively managed funds or passively managed funds. Actively managed funds are funds that use research, trading and portfolio management to strategize based on the movement of the market. Passive management rides the market through highs and lows to hit a benchmark.

Which strategy is better? That depends. Morningstar data from 2017 found that 43% of active managers outperformed their passive peer — a feat that only 26% of active managers achieved in 2016. Also, actively managed funds often have higher fees than those that are passively managed.

Still, many investors may use a combination of both strategies, potentially choosing active management for sector and specialty funds, where research, modeling and industry knowledge could potentially be useful in creating and maintaining a high-performing portfolio.

What are the pros and cons of investing in equity funds?

Beginning investors who wish to potentially invest outside their 401(k) may wonder whether they should buy equity funds, individual stocks or consider another investment vehicle for their money, such as buying real estate. As with all investing decisions, the right answer depends on your unique goals, financial situation and tolerance for risk. Here are some things to consider when considering investing in equity funds.

Pros of investing in equity funds

  • A relatively low-maintenance way to manage investments. Instead of researching each company before purchasing stock, an investor can research the performance of the fund and periodically check in on its performance.
  • Risk mitigation through a range of investments. One potential advantage of investing in an equity fund is that it offers exposure to many publicly traded companies at once, which can help mitigate risk when one particular company underperforms.
  • Potentially lower fees than purchasing individual stocks. Buying individual stocks can come with fees, commissions and asset charges. While equity funds have management fees, fees for investment funds have dropped dramatically across the board since the 2008 recession, with an average fee for equity funds at 0.59% in 2017, according to the Investment Company Institute.
  • Equity funds can serve multiple investment goals. Equity funds can be selected for 529 plans, Roth IRAs and other investment options, as well as an individual investment account. The versatility of equity funds can make them appealing to investors who may have multiple investment accounts earmarked for various goals.

Cons of investing in equity funds

  • Duplication is a possibility. If you have multiple accounts with equity fund investments, it may be possible that you’re holding more stock in one specific company than you realize. The wide exposure to positions can make it hard to understand what you own, which can make it tough to know the best moves to make to manage your portfolio.
  • Low maintenance is not the same as hands-off. Even though equity funds may be lower maintenance than individual stocks, it’s still smart to look at performance, consider asset distribution, and potentially consult with an independent financial advisor to make sure that your portfolio is optimizing performance.
  • Lack of ownership. While you may “own” shares of Amazon through your investment in an S&P 500 index fund, does that mean the shares are yours? No. You own shares of the fund, which can be frustrating for people who may want to track the performance of a specific company or try to get in early on the next Amazon.

How to invest in an equity fund

If you have a 401(k), it’s a good time to look at your asset allocation and see whether you’re already invested in equity funds. You may wish to research what your plan offers and potentially redistribute your portfolio based on your retirement goals. Roth IRAs, 529 plans and other investment accounts may already have equity fund investments as well.

If you wish to invest in equity funds, general investing advice holds true: Know your risk tolerance, do your research and know your financial goals. While costs may be lower than they were in the past for equity funds, it makes sense to compare fees, fund options and management style between brokerages.

Finally, it may make sense to invest in several equity funds as part of your overall investment strategy. For example, because of their relative predictability, some investors decide to make a large-cap index fund the core holding of their portfolio, and then allocate smaller percentages to other fund options.

Deciding whether equity fund investments are right for you

Equity fund investments may not be flashy, but low investment minimums, low-touch management, and exposure to a wide array of publicly traded companies, global markets and specialty sectors make equity funds an appealing investment option.

While some equity funds, such as index funds, can be a good choice for conservative investors, other options like emerging global markets or small-cap index funds can appeal to investors who don’t mind some risk. Tracking equity fund performance over time can also be a way to familiarize yourself with how certain companies perform, and can help make you an informed investor if you do eventually wish to buy individual stocks.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anna Davies
Anna Davies |

Anna Davies is a writer at MagnifyMoney. You can email Anna here

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What Is Online Trading and How Does It Work?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You go online to connect with friends, shop for groceries and stream entertainment. But would you consider online stock trading for investments? Many people who trade stocks do so exclusively online, with many brokers offering platforms that make trades seamless from your mobile device as well.

But what is online trading, what are the alternatives and what sort of online brokerage is right for you? Here is some important information you should know about before investing online.

What is online trading?

In the past, one had to have a stockbroker to invest. This stockbroker would take orders over the phone (or in person) and trade on the floor of an exchange in real time. A stockbroker would likely get to know their investor clients, advising them on potential financial moves.

Because an investor needed to have a relationship with a broker to make a trade, this generally meant that investing was primarily for the well-off. After all, a stockbroker or brokerage firm only has so much bandwidth to personally handle clients, meaning that investment minimums were often quite high. To sell a stock, a stockbroker had to be on the trading floor, yelling orders and using hand gestures to negotiate buys and sells.

As technology evolved, electronic communication networks gained prominence in the ‘90s, making it possible for computers to match buy and sell orders on the market automatically. Coupled with sophisticated algorithmic programs, stocks were easier to buy, sell and trade. As online trading grew, minimum investment requirements fell and brokerage firms that specialized in online trading became more popular.

Today, traditional brokerages and stockbrokers still exist — and the trading floor of the New York Stock Exchange remains active and loud — but even serious investors with millions of dollars in the market may choose to trade online exclusively.

The advantages of investing online

With many discount brokers, online-only brokers and robo-advisors, online investing can be simple, even for a beginner. Online trades typically have far lower fees than the commissions that might go to a broker on the floor.

Online investing can also happen on your own time, and online investing may make you feel like you have more control in terms of deciding when and what you want to trade. Online investing platforms often have robust education resources, allowing investors the opportunity to learn about the markets on their own time.

The disadvantages of investing online

For beginning investors, the lack of human touch may make it possible to invest too much or to make inadvisable snap decisions based on market volatility. Some brokerages offer access to human brokers for what are called broker-assisted trades, although the fees are usually much higher than purely electronic trades.

Floor traders may still have some slight advantages in making market volatility work in their favor. For example, floor traders have access to the d-Quote, a tool which can be used up until the stock market closes at 4:00 p.m. Eastern time (which can be some of the most valuable minutes of the day). Stockbrokers on the floor can also step in during times of electronic error, and fans of in-person trading say that the human touch can be especially important during times of financial crisis.

In general, though, online trading can be a smart and economical decision for beginning and experienced investors alike. Of course, it’s important to remember that whether you’re having investments traded with the assistance of a broker or traded electronically, all investment carries risk.

How do you begin trading online?

To trade online, you need to choose a brokerage and open an account. How do you choose a brokerage? That depends on a host of factors including fees, account minimums and even how well you like the interface of the brokerage’s online platform.

Getting started

After you’ve set up a brokerage account, you may want to decide which stocks to purchase. It can be tempting to pick stocks based on recent news headlines, a hot tip you saw in your Facebook feed or even companies you like and believe in. But for every “I bought Apple stock in 1987” success story, there are investors who have lost major money on hunches and headlines. Do your due diligence, look at market performance, and also decide why you may want to trade online.

Trading online can be fun, exciting and a good way to make money, but it can also be risky if you have limited knowledge or experience. Of course, one of the ways you can gain valuable experience is by jumping in, but it may make sense to invest a small amount of money when getting started and add more over time as you become familiar with your risk tolerance.

If your goal is to have a dynamic portfolio but you don’t necessarily have the time to manage it yourself, looking into brokerages that offer robo-advisor services may make the most sense. A robo-advisor is an algorithm that can manage your portfolio based on factors including your risk tolerance and financial goals for the account.

Finally, it may make sense to work with a financial advisor to help you clarify your financial goals. Some brokerages can offer clients a referral to an independent financial advisor who may be able to suggest the best path for you.

Making trades

When you’re ready to trade, you need to decide whether you’re going to execute a market order or a limit order. A market order is a buy or sell order that happens immediately at market prices. A limit order will cap the maximum or minimum price the stock should be at to buy or sell.

Once your order is executed, make sure the order went through — some tech glitches might make it difficult to ascertain whether or not an order was processed, and an erroneous double-click or backspace can be a costly mistake. Finally, know how your trades are being paid for. For example, if you purchase a security in a cash account, it must be paid for before it is sold or traded.

As you begin to buy, sell and trade, you’ll learn more about how trades work, pitfalls to avoid, and hopefully have some of your own “Apple stock in 1987” stories. But it’s also equally important to remember all the other avenues for investing, including mutual funds, money market funds and IRA accounts. While these may not be as “exciting” as the rise and fall of the stock market (although they all still carry risk), these avenues can be a way to invest without necessarily exposing yourself to the same types of risk that the stock market may bring.

How much does it cost to trade online?

Online trading may be much less expensive than opening an account at a full-service brokerage firm, but fees and commissions can add up. That’s why it’s important to compare fees across brokerages.

An online brokerage account will likely come with investment fees. While fees vary for a variety of services, they can add up over time. Fees that beginning investors are likely to come across include:

  • Platform fees: Platform fees are the administrative costs of having an open investment account and may include inactivity fees or transfer fees if you wish to close the account or transfer funds. For example, Vanguard has an annual $20 platform fee for brokerage accounts, which can be waived if an investor chooses to enroll in their e-delivery service instead of receiving paper statements.
  • Trading fees: This is the commission cost for each stock trade. For example, TD Ameritrade has a $6.95 fee per online equity trade.
  • Advisory fees: If you’re having your account managed by a robo-advisor, you may be charged an advisory fee that is a certain percentage of your total account balance. For example, Ally Invest has a 0.30% advisory fee for automated investment portfolios.

As more online trading platforms have burst onto the scene, fierce competition for clients has meant fierce fee competition between brokers. Are there any online brokers who offer free or cheap trades? Yes. For example, Robinhood is an online-only platform that offers commission-free trades.

So why wouldn’t one want to simply go with the brokerage that offers the cheapest way to trade? Other factors including customer service, ability to open multiple investment accounts within the same brokerage umbrella, and access to different types of investments and research can all make the difference in deciding which brokerage — and which fees — make the most sense for your financial goals.

Bottom line

Online trading gives you the option of trading stocks in bed (or just about anywhere), on your terms. That can be a double-edged sword for some investors, who may feel like online investing gives a video-game quality to the stock market. Those investors may benefit from working with a financial advisor or full-service brokerage.

For others, online investing is a good way to build up confidence, learn investing basics and grow their portfolio to help put them on the path to a satisfying online investing experience.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anna Davies
Anna Davies |

Anna Davies is a writer at MagnifyMoney. You can email Anna here

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