529 COLLEGE SAVINGS PLANS
If you find yourself intimidated by the ever-rising price of higher education, then a 529 college savings plan might be a key component in saving for a college education. A 529 college savings plan is a tax-advantaged way to save for college and pay for higher education expenses. Unlike some other savings vehicles, a 529 college savings plan may allow you to make sizeable contributions. The funds may generally be used for any qualified college or higher education expense, including tuition, room, board, fees, books, supplies, and equipment. Tax benefits may be subject to certain restrictions.
Money in a 529 college savings plan grows tax deferred. And you may be able to withdraw the money without having to pay federal and state income taxes—depending on the plan and where you live—as long as it’s used to pay for qualified, higher-education expenses. 1If the money from 529 college savings plans is used for other purposes, the earnings portion of a withdrawal is subject to ordinary federal income tax, an additional 10% federal tax, and any applicable state income taxes. 529 college savings plans may also affect a student’s eligibility for financial aid.
Types of 529 Plans
Although many details of 529 college savings plans vary by state, they generally come in two forms:
College savings plans
Allow you to invest your money in an account to pay for the student’s higher education expenses. Students can use the funds for qualified expenses at accredited institutions in the U.S. and abroad.
Prepaid tuition plans
Allow you to lock in tuition rates at eligible colleges or universities with a lump-sum investment or monthly payments. In other words, since you are paying in advance, you are avoiding potential tuition inflation down the road.
FAQ
529 plan history
A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.
State plans are OK for out of state colleges
529 Plans can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a CA resident, invest in a VT plan and send your student to college in NC.
Which states offer 529 plans?
Nearly every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest, research state 529 plans and even compare between plans.
