529 Plans

529 plan offer tax-free withdrawals when the funds are used to pay for qualified higher education expenses. In general, this includes costs of attending an eligible post-secondary educational institution. Starting January 1, 2018, this definition is expanded to include up to $10K per year in tuition for K-12 schools.

There are two types of 529 plans: prepaid tution plans and 529 college saving plans . All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

All 529 college savings plans are sponsored by state governments, but only a few have residency requirements for the college saver and/or beneficiary. State governments do not guarantee investments in college savings plans. College savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC. Similar to most investments, investments in college savings plans may not make any money and could lose some or all of the money invested.

These state-sponsored 529 plans are named after the federal tax code section that provides for their use. All 50 states and the District of Columbia offer 529 plans. The contributions to the plan are not tax-deductible, but your withdrawals are tax-free when you use the money for a qualified educational expense.

529 plans fall into two categories: prepaid tuition and savings/investment plans.

The prepaid tuition plan allows you to purchase units of tuition for any state college or university under today’s price. You are buying a semester of attendance for a child. What you buy today will be good for any future date, no matter how tuition rates rise. With private and out-of-state colleges, the child’s prepaid tuition does not include the rise in tuition costs. For example, if you buy two years of college tuition for out-of-state, you may only receive a single semester in ten years.

Either the beneficiary or the contributor must reside in the state that the 529 is formed in.

With savings plans, an account is opened and investments are chosen within the account. If you start the plan when a child is young, you can choose some aggressive investments for long term growth. As the child ages, you can move your investments into more conservative options.

The withdrawals are tax-free if they are used to pay for college expenses. These expenses can include tuition, books and room and board. An easy way to think about a 529 savings plan is as a 401(k) dedicated to educational expenses. As with a 401(k), there are many different investment choices. Many states programs are open to nonresidents, so look around for the best plans.

If your child decides not to go to college you have three options. You can hang on to the savings plan in case your child decides to attend college at a later date. The account can be transferred to another family member for college expenses. You could also cash out the account and just take the loss. Most states will charge a penalty of 10% of the earnings for any withdrawal not used for education. On top of this, a federal penalty of 10% will be charged also. There is no penalty for withdrawals due to death or disabled status.

The tax-free advantages of college savings plan make 529 plans beneficial, but they aren’t right for everyone. If you have a 529 prepaid tuition plan, applying for financial aid is affected by reducing your financial aid on a dollar per dollar basis. Low-income families, who are often eligible for large amounts of financial assistance, are advised not to participate in 529 plans.

Summary Benefits of 529 plans

529 plans provide important advantages to account owners and beneficiaries.

• Earnings aren’t subject to federal or state tax when used for qualified higher education expenses, such as:
  • Tuition and mandatory fees
  • Computers, peripheral equipment, educational software, and internet access
  • Books, supplies, and required equipment
  • Room and board for students enrolled at least half-time
  • K-12 tuition expenses at public, private, or religious schools
• Many states offer tax credits or deductions on contributions.
• Enrollment is open all year.
• Account owners—not the beneficiary—control their accounts.
• There are no age, income, or residency restrictions.
• Plans typically offer a range of investment options.
• Withdrawals can be used at any eligible higher education institution.
• 529 funds can be used for college, university, post-secondary vocational or technical school, or graduate school.
• Funds can be used for tuition at K-12 schools.
• Saving is less costly than borrowing.

Source:CSPN (College Savings Plan Network)