What Is a 529 Plan?

Are you looking for ways to save for your child’s education? Consider the 529 plan. First, let’s get started with its definition. A 529 plan is one of the many options parents have for saving for their children’s college education. States and educational institutions operate these plans, and they’re designed to help families put aside money for future college expenses. It’s named after Section 529 of the Internal Revenue Code, which created the savings plans in 1996. Keep reading to learn more about the advantages and disadvantages of a 529 plan and how you can enroll in one if it suits your needs.

Should you enroll in a 529 Plan?

Though a 529 plan is a great option to save for your child’s education, it comes with some drawbacks. We have put together a chart to summarize the advantages and disadvantages of enrolling in a 529 plan.

It’s as easy as 1, 2, 3

A 529 plan is very low maintenance and easy to use. When you want to enroll in one, simply contact your financial advisor or visit the plan’s website, here. Most plans have a “set it and forget it” feature where you can sign up for automatic contributions each month.

Additionally, the state treasurer’s office or an outside investment company will handle the ongoing investment management of the account, so you don’t even have to worry about handling those details. You simply decide how you would like your money invested. Most plans have some type of age-based or risk-based option that automatically adjusts as your children get closer to attending college.

Anyone can contribute

You’re not the only person who can contribute money to a 529 plan. Family and friends can also add funds. This makes contributions a great gift idea, especially as children get older and harder to shop for. However, laws on tax breaks can vary from state to state, so make sure you check with your plan.

Everyone is eligible (Crazy, right!?)

One advantage of the 529 plan is that everyone is eligible. Unlike Coverdell Education Savings Accounts and Roth IRAs, there are no age limits, income limits, or annual contribution limits for 529 plans. Additionally, there are no lifetime contribution limits. If you want to reduce your estate taxes, you can also treat contributions between $14,000 and $70,000 like they were made over a five calendar-year period and qualify for the annual gift tax exclusion.

529 Plan = Flexibility

In addition to the other benefits previously mentioned, 529 plans are flexible. You’re allowed to change your 529 plan investment options twice a year, and you can rollover your money into another 529 plan once every 12 months. Another benefit to keep in mind is that there’s no federal limit on the number of changes you can make if you replace the account beneficiary with another qualified family member at the time you make the change.

There’s an extensive list of qualified expenses

You can use a 529 plan to pay for tuition to undergraduate school, graduate school, a trade or technical school, and even some golf schools and culinary schools. In addition, even some accredited schools abroad might qualify. If you wish to pay your college expenses such as books, room and board, computers, and fees, you can do so by using your savings from your 529 plan.

Keep in mind, that once you invest in the account, the money can only be used for educational purposes. Unfortunately, withdrawing money for anything else will impose penalties and fees on your saved money. Pre-college expenses such as application fees and campus visits are not considered “college expenses”, so such expenses will also impose penalties and fees. To avoid misunderstanding what falls under the “college expenses” umbrella, contact your school’s financial aid office and ask about their cost of attendance and what’s included in it.

You have TOTAL control of your account

With custodial accounts, your children take control of the assets in the account when they reach the legal age. As a result, you have no control over how they spend the money afterward. However, with a few exceptions, you will have control of the 529 plan and your children don’t have any legal rights to the money. This way, you will be able to track how your child spends the money.

You can also withdraw money at any time and for any reason. Just remember that the earnings portion of any non-qualified withdrawal will be subject to income tax and a 10 percent penalty tax.

It’s okay to have multiple plans

There’s no limit to the number of 529 plans you can have. Therefore, if you already have a plan in your state but it’s not working for you, you can always find a plan that suits you better. If you move to a different state, you’re also able to sign up for their plan if it has better benefits than the one from your previous state. Finally, if you want, you’re allowed to have multiple accounts in different states around the country and you never have to combine or consolidate them.

You might qualify for income tax breaks

Certain plans might offer some tax benefits. Well, a 529 plan is no different. In fact, if you choose a 529 plan you might also qualify for income tax breaks. On the assumption that you choose a plan like a mutual fund, you’ll likely have to give up a portion of your earnings to annual income taxes. Be aware, that you will also get hit with the capital gains tax when you withdraw funds from this plan. Tax regulation conditions can alter 529 plans. The way you use the funds in the account can change in varying political conditions.

The amazing part of all of this is that your earning will grow federal tax-free, and you won’t have to pay any taxes when you withdraw money to pay for college expenses. You also won’t have to report any contributions to a 529 plan on your federal tax return, and you won’t get a Form 1099 to report taxable or nontaxable earnings until you start to make withdrawals from the plan. In addition, if you withdraw the amount can be counted as untaxed income. Resulting in an increase of the Expected Family Contribution (EFC). In case you don’t know the definition of the expected family contribution and how it’s determined, check out this article: What is Expected Family Contribution?

Which states offer 529 plans?

Every state offers some type of 529 plan, and you’re not bound to your state’s own plan. In fact, you can pick which plan to want to contribute to and which state. For this reason, it’s crucial that you research which plan will suit your needs the best. Each state facilitates various benefits to go along with their plans and to appeal to those families interested. For instance, some states don’t require any type of minimum contribution, while others will offer a tax benefit for in-state contributors.

To attract even more families, some states will also offer a partial scholarship to go along with its plan. As an example, New Jersey residents can earn a scholarship of up to $1,500 that goes toward the first semester of a student’s freshman year at approved schools.

Finally, the 529 plan is among one of the most common plans used by families nationwide to save for their child’s education. With this information, you now have a better idea of what a 529 plan is and the benefits one can offer you, as you save for your children’s college education.