Are you familiar with the “529 Plan”?
The 529 Plan is a tax-advantaged college savings plan that is often regarded as one of the best and easiest ways to prepare for the cost of a child’s education. This plan offers both financial aid and tax benefits for students. When considering the 529 plan, note that there are two types.
- The College Savings Plan: This is a savings account that is strictly used to go towards saving money for college tuition. The contributions to this 529 plan are rolled into stocks, bonds, and other securities. These investments will continue to grow until the selected beneficiary withdraws the available funds. There are two types of investment savings plans—Custom 529 Plans and Age-Based Plans. The contributor has greater control over a custom plan, which allows for the contributor to create their own portfolio; while Age-Based Plans gradually reallocate investments.
- The Prepaid Tuition Plan: This plan allows parents or other contributors to prepay tuition at today’s tuition rates, locking in the cost, at eligible colleges and universities. These plans notoriously only cover the costs of tuition and fees, and leave out textbooks and boarding facilities.
Each of the two 529 plans have owners who will inevitably control investments and beneficiaries.
The contributions to a 529 plan will not be exempt from federal taxation. However, earnings on the investments qualify to be tax-deferred.
Families speak highly of the 529 plan because each plan allows for the ease of payment over time. You can research the tax benefits and plan guidelines for your state, as each state operates differently.
After selecting the plan that works best for your family, you will need to fill out paperwork through your specific state’s administrator and follow all net steps given to ensure the proper set up of your chosen 529 plan.
How does a 529 Plan help with college expenses?
Here is a detailed breakdown of the top 7 ways a 529 Plan can help with college expenses!
- College Tuition (and fees!): A beneficiary can use the saved money within a 529 Plan to pay for tuition and fees.
- On and Off-Campus Housing: It is possible, depending on the plan chosen, for the beneficiary to use funds to pay for both on- and off-campus housing during their college enrollment. If the beneficiary chooses to board off campus, the rental is qualified up to the cost of room and board on campus. For example, if on-campus housing is $1,200 per month, the beneficiary is allowed up to $1,200 a month for off-campus housing.
- Trade and Vocational Schooling: A 529 Plan can be used towards four-year, two-year, vocational, trade, and even graduate schools.
- College Meal Plans: Your chosen 529 may also qualify to help with food and meal plans. This accounts again for both on and off campus, qualified expenses. The same goes as with housing—the off-campus charge must be equal or less to on-campus charges.
- Internet Service: This is a cost many don’t account for, but it can be a qualified expense!
- Electronics: If a computer is required by the beneficiary’s chosen school, the 529 plan in place can go towards this expense. If it is not required, a computer is not a qualified expense. Most colleges and universities now require these as part of the student curriculum, so check with your designated school.
- Textbooks and Other Required Supplies: Once again, textbooks and supplies that are made mandatory by each class are expenses that can be covered within a 529 plan.
Important factors to keep in mind.
There are a few key factors to keep in mind that are common questions when enrolling in a 529 Plan.
How can I contribute to a 529 Plan?
Contributing to a 529 is simple! The contributor, family or friends can contribute at any time to the plan. Contributions can be completed through direct withdrawal, automatic monthly payments, and even by check. Check with your plan to view tax implications on contribution limits.
What if the beneficiary decides not to go to school?
Many contributors ask this question and rightfully so. If the beneficiary decides against going to college, the contributor may elect a new beneficiary or simply withdraw the saved funds. Keep in mind if the contributor withdraws funds that will not be used for college expenses, the funds are subject to a 10% federal penalty tax. Investment growth over the lifetime of the plan will also be subjected to income tax.
What if the contributor or beneficiary moves out of state?
Moving should not affect your 529 Plan. However, moving out of state may decrease or eliminate the tax benefits associated with the account.
Final thoughts on the 529 Plan.
These plans are a fantastic option for those who are ready to start saving for their beneficiary’s future. Do your research on the specific type of 529 Plan that will fit your lifestyle and align with future goals of your beneficiary in order to access all of the benefits available!
These plans are great options for those who would like to save over time for a beneficiary’s college education, and will lead to less stress and financial burden in the long run!