What the TIPS Means in the 529 College Savings Plans

In order to understand what the Treasury Inflation-Protection Securities (TIPS means in 529 plans it is important to understand what a 529 Plan is. A 529 Plan is an investment plan to save specifically for a college education.

The 529 Plan, named after the code in the IRS tax code corresponding to the plan, is often used by parents as a way to set aside money for a child’s future college education when they are still young that utilizes investments in stocks and other investment tools in order to not only put money aside for that child’s college education but to increase the amount of the original investment through interest rates and return rates on particular investments.

Since the 529 Plan is a state based investment, the state sets up an account with an asset management company of its own choice and the parents open a 529 Plan account with that asset management company. The parents deal directly with the asset management company, not the state. When parents sign up for a 529 Plan they have two options in terms of how they structure their investment.

The first option when investing in a 529 Plan is to prepay tuition at a participating educational institution at the current tuition rates, guarding against tuition inflation. The downside to this option is obviously that the child must then attend that particular college and won’t have a have a choice of schools when it is ready to move forward to a college education.

The child may not want to attend that particular school or may not have the credentials necessary to be admitted to that school. Parents also take the risk that school will no longer be in business by the time the child is ready to attend. The advantage is that with the huge rise in tuition costs yearly the parents will be able to lock in a low tuition rate for their child’s education.

The second investment option when investing in a 529 Plan gives parents the chance to put money into a tax-deferred earnings account that can only be used to pay for their child’s education.

The advantage of this method is that the child can attend any college they choose or can qualify for. The disadvantage is that parents will be paying the current tuition rate at the time that the child attends the college, which might be significantly more than the tuition rates offered now.

Regardless of which plan the parents choose, the basic idea of the 529 Plan is the same. Parents are investing money with the idea that the earnings on that investment will grow to meet the costs of a future college education for their child. The second option is usually the one preferred by parents.

When parents open a 529 Plan account they are agreeing to let their investment be handled by the asset management company chosen by the state. The asset management company may decide to put part of the initial investment in stock and part of the investment in fixed-income securities to maximize the return potential and the potential growth of the investment.

This type of allocation plan is preferred because it offers investors a balanced return over the period of the investment. In order to protect the investor against rising inflation costs, as much as one half of the investment that is designated for fixed income securities can be placed in Treasury Inflation-Protection Securities or TIPS which provide protection for the investor against inflation.

So asset management companies invest the money of parents who are buying 529 Plan accounts to pay for their child’s future education in Treasury Inflation-Protection Securities or TIPS to protect that investment from inflation over the course of the investment term.

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A Sunny view on Florida’s 529 College Plan Options

Take a look to Florida for a sunny view on 529 college plan options. The Florida College Investment Plan (which is managed by the State of Florida) offers five great investment options. You can choose one or any combination of the investment options.

Once in a calendar year, you can transfer the money that you have already invested from one option into another. Plus, you can change the allocation of new monies as often as you please.

For a moderate risk option you should look into the first option, which is a Fixed Income Investment. This option is invested mainly into things like mortgaged backed securities, U.S. Treasury Bonds and corporate bonds.

The second option for your 529 is a little riskier. It’s the U.S. Equity Investment Option, which makes equal allocations of your monies among an S&P 500 index portfolio, a large capitalization growth portfolio and a large capitalization value portfolio.

The next option is my favorite, an Age Based Option. This allows you the flexibility to choose how conservative, moderate and high risk you wish for your 529 investments to be. It’s based on the age of your child. You would have more monies invested in equities the younger your child is. As your child gets closer to college age, there would be an increase in the amount invested in fixed income investments.

The fourth of Florida’s 529 college options is a Balanced Investment Option. What this means for you is that your monies are equally distributed between the U.S. Equity Investment Option and the Fixed Income Investment Option.

The goal of the Balanced Investment is to create long-term growth but with less risk than by investing alone in the U.S. Equity Investment Option. This portfolio is reviewed occasionally to keep a 50/50 allotment of monies to the U.S. Equity Investment Option and the Fixed Income Investment Option.

And last but not least is the 529 Money Market Fund Investment Option. This fund has a portfolio of short-term fixed income securities, money market and cash securities. The goal of this fund is to keep your main investment and obtain high liquidity through short-term securities.

The great thing about these 5 options for Florida’s 529 plan is that you can pick just one or a combination. Do whatever fits your financial goals best.

The fees for these accounts are minimal. Expect a $50 enrollment fee, and an asset management fee of 0.75%. Unlike a lot of other 529 plans, the Florida College Investment Plan charges no commissions or sales tax. You do not have to be a resident of Florida to participate so it’s a great plan for grandparents to invest for their grand children who live out of state.

The minimum opening amount is $250 and your account has a maximum funding amount of $341,000. Once the total value of the accounts for the each child reaches $341,000 you cannot add any more monies. But the market value can continue to grow and you can have accounts of $341,000 for more than one child. There are no age restrictions either, so you can even open an account for an adult.

Imagine $341,000 stowed away for college that is growing tax deferred. And when your child is ready for college, qualified expenses are exempt from federal income tax. Plus, the great state of Florida has no income tax and the plan assets are exempt from Florida Intangible tax. There is a sunny view on Florida’s 529 plan options. Florida is a great place to have a 529 plan for your child.