529 Educational Savings Plan

If you want to save for your children, grandchildren, or other beneficiaries’┬ácollege this is the fund you’re looking for. We have to go back to 1996, which was when the 529 saving plan was created. Oddly enough, 529 is the section in the Internal Revenue Code used to govern the guidelines for this saving plan.

What is a 529 Savings Plan?

A 529 is an educational savings plan administered by a college or university for which contributions are made for a students future college costs. Under the 529 plan rules, the institution must qualify and be eligible to accept this savings plan. You can check with the IRS or the institution itself to see if they qualify.

How Does the Plan Work?

Once you choose a plan (covered below), you become the donor. You name a beneficiary (student), but you retain total control over the account. This means you decide how the money is invested, when and where it’s used, and you can also reclaim the funds at any time. If you choose to reclaim the funds, the earnings portion of the withdrawal is taxed and a penalty of 10 percent will be imposed.

Each state has their own 529 program administration. You can rollover the plan to a different state each year; there is an exemption if your change the beneficiary on the plan.

There are no age restrictions or income limitations, and most states allow contributions as high as $300,000; which is a substantial amount for most universities.

Tax Benefits

At the federal level, the investments in your 529 plan grow tax-deferred, and when the time comes to pay tuition the distributions are federally tax-free. As far as states go, you will have to check with the state you’re plan is with, some states not only give the donor deductions, but also exempt the withdrawals from state income tax.

As mentioned, if the funds are not used for college fees, then the investment portion of the plan is subject to taxes and penalties.

Types of 529 Plans

There are two types of 529 plans, there’s a savings plan and there’s a prepaid plan.

Savings Plan

Direct Sold – managed by a professional investment manager; state approved; no sales charge.

Broker Sold – sold through financial advisers; will incur sales charges and/or fees.

Prepaid Plans

Contract – purchase 1,2 or 4 years tuition contract at a set price; can be a lump sum or installment purchase.

Prepaid Unit – purchase a unit or credit at a set price; price locked in even if the unit costs more in the future.

The 529 savings plan is a great way to save for your children’s college education, and there is little downside unless you decide to reclaim the funds. That’s the only negative we have uncovered in the 529 plan.

The flexibility to change beneficiaries, move from state to state, tax benefits, and investment options makes the 529 savings plan a winner for families saving for their children’s college costs.

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