For many students, it helps to have some funds set aside to help cover the cost of education. Financial aid may be available to those who are eligible. A 529 is a specific type of savings plan that may be a great fit for many people. It is important to understand what it is and how it works to determine if it is a viable route for your needs.
What is a 529 College Savings Plan?
A 529 plan is a type of tax-advanced savings plan. The goal of this type of plan is to encourage the saving for furniture education costs. These plans are sometimes called qualified tuition plans. They are sponsored by a state, a state agency, or an educational institution. They fit under Section 529 of the Internal Revenue Code.
In short, a person may wish to put funds aside into these plans now so that the named student may then use them later when they enroll in their education.
As a state-sponsored plan, the terms and conditions for how these plans are used differ in each organization. It is necessary to read through the terms and conditions for the plan you select within your state to know what to expect with them.
What Are Some Benefits of a 529 Plan?
The key benefit of this type of plan is that it is tax advantaged. That means that the funds are put into the account and allowed to grow there without having taxes levied on them. The hope is that interest builds on the account and grows its value over time. Then, when the student uses the funds for qualified tuition and other costs, they do not have to pay taxes on those funds as they are withdrawn. Limitations and restrictions apply.
What Are the Types of 529 Plans?
There are two types of 529 plans that you may elect based on availability in your state: prepaid tuition plans and education savings plans. Here is a look at the differences.
Prepaid Tuition Plans
This type of plan lets the saver purchase units at participating colleges or universities. Sometimes savers purchase credits. Many times, the participating colleges and universities are public or otherwise in-state institutions. Savers purchase those credits for future tuition and mandatory fees required by the school. They purchase them at the current prices for the listed beneficiary on the plan.
Prepaid tuition plans do not allow for the payment of future room and board costs at colleges or universities. Also, it is not possible to use those funds to prepay for tuition at an elementary or secondary school.
Many times, these plans are sponsored by the state governments. Savers and sometimes beneficiaries need to have residency in that state (requirements differ). These plans do not have any federal promise to them, though some states may promise the funds if paid into a prepaid plan that the state is sponsoring. This is not the case in all situations.
If there is a financial shortfall and there is no promise in place, the saver may lose some or all of the funds they put into the plan. Also, note that with prepaid tuition plans, the student may not receive as much of the funds saved for them if they do not attend a qualified and participating school within the plan.
Education Savings Plans
The second option is an education savings plan. It allows the saver on the account to open an investment account. The funds put into the investment account are meant for the listed beneficiary’s qualified higher education expenses. This may include the student’s tuition, mandatory fees, and room and board costs. In many cases, the withdrawals from these plans may be used to cover the cost of education at any college or university. In some cases, colleges and universities overseas may quality.
Students may apply as much as $10,000 per year per beneficiary to these costs. This may be at a public, private, or religious elementary or secondary school as well as colleges and universities.
With education savings plans, the saver may be able to select from a range of investment portfolio options. This may include exchange-traded funds or mutual funds. They may also elect a protected bank product.
These education savings plans are sponsored by state governments, though some have residency requirements for the saver and beneficiaries. Some states do not provide promises on these funds.
Frequently Asked Questions
If you have a few questions about 529 college saving plan options, take a look at these questions. You may find they offer some insight into the way these plans may work.
Who May Open a 529 Plan Account?
A 529 plan may be opened by a parent, grandparent, friend, or relative. In addition, it is possible to open these accounts on your own for your own savings for educational expenses.
Which states offer a 529 college savings plan?
All 50 states and the District of Columbia sponsor at least one type of 529 plan. In addition to this, there are some private colleges and universities that also sponsor prepaid tuition plans. You may wish to check with your state to learn more about the specific options available in your area.
These plans are tax-advantaged plans that are available across the country. States, state agencies, as well as some educational institutions sponsor these plans. This is done under Section 529 of the Internal Revenue Code.
Are 529 plans only for kids?
No, it is possible for anyone to use 529 plans in the family, including you. These plans typically cover the educational expenses, including the cost of college or some types of post-secondary education. That includes the tuition costs for private and secondary school at a public, private, or religious school.
Also, note that the person who opens the account is called the account holder or sometimes the saver. The person that the account is named for – and who may use it – is the student or beneficiary. The account holder and the beneficiary may be the same person. In other words, you may be able to open this type of account for yourself.
What may I use my 529 plan assets for?
There are many ways that you may be able to use a 529 plan. Many times, these are used to save for educational expenses for the student, which may be any student in the family. There are a range of qualified education expenses that you may use for this. This includes tuition. The funds within the account may be used at any religious, private, or public school, including college, post-secondary education, elementary, and secondary schools.
There may be other types of qualified higher education expenses. This may include room and board as well as any mandatory fees, books, computers, and software. These are considered mandatory, not optional, purchases for education.
What happens to the funds invested in my 529 plan if my child receives a scholarship?
This may differ from one state to the next. When it comes to merit-based scholarships, the 529 savings plan does not have an impact on the amount of scholarship you may qualify for. These are not need-based scholarships. As such, they typically do not play a role in the use of a 529 plan.
Need-based scholarships may be based on a student’s financial needs. Having a 529 plan in place may reduce the amount of financial assistance provided simply because the student has those funds set aside. That may mean that you may not qualify for all of the need-based scholarships you would without those funds. Be sure to check with our state’s 529 plan to determine how this is handled.
Does investing in a 529 plan impact financial aid eligibility?
Each school treats the funds or assets in a 529 account differently. It is important to check with the details of the state plan to know the specifics. In many cases, investing in a 529 plan generally impacts a student’s eligibility for any type of need-based financial aid for their college education.
One key to consider about this is loans. Many times, for college education, a large part of the offering in a student aid package includes loans. By working to save funds through a 529 plan throughout the student’s lifetime, there may be less need to rely on loan loans that need to be repaid down the road.
What restrictions apply to an investment in a 529 plan?
Many 529 plans have some type of restriction on them. It is quite important for those who plan to use them to read through each of these individual plans to understand what their specific rules and restrictions are before making the decision to use them.
For example, there are often limitations and restrictions related to the underlying investments. Fore ample, some may have pre-set investment options. Many do not allow users to switch between options often. Current law states that account holders are only allowed to make changes to their investments two times per year or when there is a change to the beneficiary receiving the funds.
Another common restriction is on withdrawals. Often, those with a 529 plan may withdraw funds from the account for qualified higher education expenses or for tuition costs. This may apply to only elementary and secondary schools. If they do so outside of these limitations, there may be taxes and penalties to pay as a result.
How does investing in a 529 plan affect federal and state income taxes?
Those who invest in a 529 savings plan may be able to apply tax benefits. These vary at the state level. It is often necessary to work with your accountant to be sure that you are taking the correct course of action for applying these savings opportunities.
Both state and federal laws related to 529 plans may change over time. Be sure to understand the tax implications of investing in these plans by speaking to an advisor. Some states offer tax benefits for 529 contributions. This may include deducting contributions from state income tax. At the federal level, the withdrawals from the 529 savings plan are not considered income, and therefore they are not taxed when they are used for qualified expenses.