What is the College 529 Plan? (Do I Need It)


College 529 Plan

Are you worried about your child’s education and the rising tuition fees? You may be glad to hear about the college 529 plan.

The question you may be asking is what is the 529 plan? Ever since its introduction about a decade ago it has been a boon for parents like you and me. It can be used to plan and ensure that our children can obtain a decent education in the future. The name comes from Section 529 of the Internal Revenue Service code that allows tax-advantaged investments instituted to encourage and promote saving up for future education costs.

A college 529 plans is an investment vehicle that allows you to save for future education costs. These investment plans are sponsored primarily by the States and possibly a few state agencies or non-profits.

It is an effective protection against inflation and exorbitant increase in tuition costs which may occur in the future. Using this investment plan families can save for the future tuitions for a beneficiary who is typically the child or a grandchild.

The most important aspect of this is that this investment grows free from federal and state taxes and is exempt from taxes for withdrawals that come under ‘qualified higher education’ expenses.

Why Invest in 529 Plans?

Studies have shown that college-educated graduates with bachelors’ degrees have a 60% higher income than those with a high school diploma. Increasingly more high school graduates are choosing to go for higher education than in the past and this trend has been increasing.

For parents, this could cause them to worry as they are uncertain if they will be able to afford the tuition fees and expenses when their kids become ready to go to college. This is where a 529 saving plan can be helpful.

Currently, more than $300 billion has been invested in more than13.6 million 529 savings plans accounts across the United States

How does the 529 College Plan Work?

College 529 plans allow qualified tuition programs to have a tax free status. The earnings in a college 529 plan are not taxed by the federal government. This allows investors to let the earnings accumulate in a tax-deferred basic investment and be ready for educational expenses when their children come of age.

The funds can be used for any accredited college or university in the US. You can join any 529 plan across the country no matter which state you live in. The list of institutions where these are accepted can be viewed at eligible institutions.

Anyone can be named as a beneficiary regardless of their relationship to the account holder, as long as they are US citizen or a resident alien with a social security number or a federal tax identification number.

What are the Types of 529 Plans?

There are primarily 2 types of 529 plans:

Prepaid plans

These are sometimes called guaranteed savings plan. These types of plans allow people to buy credits or units of courses at participating Universities and colleges at the current rates. This insures them from the volatility of the rates and will still be able to afford education in the future for their beneficiary even if the rates changes.

There are currently13 prepaid tuition plans offered by 12 states and a private College 529 plan which is also called PC529. Typically the investor pays for 1 or 4 years of tuition and this pays out when the child reaches college going age.

Educational Savings Plans

Here the investor saves up for the future by investing regularly. This will, in turn, be ready to pay for education when the beneficiary is ready. This can be set based on the age of the child.

This is different from the other plans as the account earnings are based on the market performance of the primary investments which are usually in mutual funds. The investor can choose from a wide range of investment options such as mutual funds or exchange-traded fund or a bank product where the principal is protected.

The money can be withdrawn when going to college to pay for room and board, tuition fees and other educational expense. This can be used at any University or College in any state or in some case in non-US Universities as well.

While prepaid plans allow you to buffer yourself from tuition fees becoming expensive and unaffordable in the future. Savings plans can help fund for tuition as well as qualified expenses such as room and board.

The type of plan you choose depends on your goals and needs. Some families may decide to invest in both types of investment options so that the investments are diversified.

What College Expenses are Covered by a 529 Plan?

The money can be spent in all accredited colleges and University. Participating in professional and trade schools can also accept these payments. All the expenses such as tuition fees, books, room, and lodging are usually covered.

Most of the other expenses such as materials for education computers etc. may be allowed on a case by case basis. Usually personal and travel expenses are not covered by these plans.

What Happens to 529 if the child does not go to College?

In case the child or the beneficiary does not go to college there are primarily three options available:

  • The first option is to change the name of the beneficiary to any other person in the beneficiaries’ family who may go for higher education. This may include parents, stepparents, siblings step siblings, stepchildren, cousins, nieces and nephews, aunts and uncles.

In most cases, the spouse of the beneficiary or the spouses of the previously mentioned family members of the beneficiaries is also eligible. Natural and legally adopted children of the beneficiaries can also be eligible recipients.

  • The second option is that you can defer the use of the savings and leave the contributions in the account for a possible educational need in the future for the beneficiary.
  • The third option is that you can withdraw the funds for a non-qualified distribution which means that this is to be used for expenses not in the qualified higher education expenses. But this will be subject to 10% federal tax liability.

How Much can you Contribute to 529 Plans?

Under federal law, the contributions cannot exceed the expected costs of the beneficiaries’ higher education’s expense that are qualified. The contribution can range from $300,000 to 500,000 (these limits vary from state to state) per beneficiary.

This amount is representative of what each State deems as full tuition costs including tuition, textbooks, room, and board. These vary for each State, for example, California will have a different limit than say Michigan.

Can you Use 529 Plans for any College?

Yes, you can use these funds from 529 savings plans for any accredited University or college in the country. The funds can also be used in select private institutions, trade and professions colleges and even outside the US, but investors must verify and check for each plan.

In the case of prepaid tuition plans, it is usually to be used for in-state universities and community colleges, but in some cases out of State, institutions are also accepted. You should thoroughly check the plan details for the specific program that you will be choosing.

Do I get any Tax Benefits Using 529?

Yes, the earnings on a 529 savings plan are free of Federal income as per the Internal revenue code, section 529 (26 U.S.C 529). Most States allow tax-deferred earnings and tax-free withdrawals as long as they are for qualified higher education expenses.

Are 529 Plan Contributions Tax-Deductible?

The 529 plans contributions are not tax-deductible at a federal level. But some states offer a deduction or credit on the income tax return on the in-state programs. Some States offer these deductions even if it is not invested towards in–State 529 programs.

The specific tax rules must be verified with each state program directly before investing. The contributions are also exempt from gift taxes up to an amount of $14,000($28,000 in case of a married couple filing jointly).

What Happens to any Money not Used from the 529 Investment?

The money not used will remain in the investment unless withdrawn. In case of withdrawal for non- qualified expense, it will attract a 10% federal tax on the earnings. If you want to avoid these penalties, you could choose to change the name of the beneficiary or roll over the amount to an ABLE count of the beneficiary or family member.

An ABLE (Achieving A Better Life Experience) account is specifically for people who are disabled before the age of 26 to pay for their disability reacted expenses.

How do you Sign Up for a Plan?

You need to pick which plan you want, and this may be hard since there are over 100 of them. Once you have found the plans and pick one then you have to sign-up for the plan that best fits your need.

If you want to sign-up for a plan you will have to go to the website of the 529 plan you picked. You can mail in an application or just sign-up for the plan online.

To find the list of plans then visit College Savings.

Conclusion

You learned the 520 plan is an investment vehicle for the future college education of your kids. We reviewed what is covered under the plan. How the 529 plan can be used to cover school costs. If you do not go to school, you can have another family member use the money or take it out with a penalty. If interested, then talk to a local advisor to set one up today.

Check out this info on grants and loans.

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