What is a 529 plan? You can use this plan for creating a college fund for your child while saving money in the process.
What is a 529 plan? Admittedly, it’s not very well advertised. But if you’re saving for college, it’s an essential part of the puzzle.
We all know that saving for an education is no easy task, and it seems even more challenging as tuition prices increase and learning evolves with technology like remote learning. There are unique ways to save, however, and a 529 plan is one of those methods. If you aren’t familiar with this savings plan, take a look and find out why this government-sponsored plan is a great way of creating a college fund for your loved ones.
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Discover an easier path to creating a college fund
The 529 plan has been around since 1980 and serves as a tax-advantaged savings plan for education costs. It’s a good example of a qualified tuition plan. These savings plans are sponsored by states, agencies, and educational institutions, and they are backed by section 529 of the Internal Revenue Code.
Creating a college fund is easier with a 529 plan because there are no income restrictions. You can also use the money in various ways that go beyond college or university tuition, including fees associated with room and board, books, supplies, or other necessary equipment. Furthermore, 529 plans were expanded in 2017 to include additional educational expenses, including fees associated with K-12 tuition.
What is a 529 plan? Two types to understand
The two types of 529 plans to understand are prepaid tuition plans and education savings plans.
A prepaid tuition plan focuses primarily on tuition and mandatory fees. You can’t use a prepaid tuition plan for elementary or secondary schools, or other expenses associated with colleges or universities, like room and board. The federal government does not back these plans, but some state governments will guarantee the money paid into the plan. These often have residency requirements and must involve a participating university or college to receive the full investment amount.
An education savings plan allows you to spend the money on tuition and mandatory fees, as well as room and board. Any college or university can use the funds from educational savings plans, and sometimes you can use the funds at non-U.S. schools. These plans can also be used for tuition associated with elementary or secondary schools, and up to $10,000 per year can be allocated to these areas. These plans usually do not have residency requirements.
Understanding the main benefits of a 529 plan while you’re creating a college fund
There are several benefits to using a 529 plan for creating a college fund. First and foremost, many states provide state income tax breaks to donors. 29 states and Washington D.C. offer this type of tax benefit. Seven states offer state income tax break on any 529 plan, even if it’s not the beneficiary’s home state. These seven states include Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. Furthermore, the principal grows at a tax-deferred rate, and distributions associated with college or university costs are also tax-exempt.
Another benefit of a 529 plan is how it operates in relation to assets. A 529 plan does not count assets as part of the donor’s gross estate. Due to this, a 529 plan can also have value as an estate planning tool.
A 529 plan is ideal for those who want a hands-off approach to creating a college fund. Once you select your desired plan, fill out an enrollment form and makes a contribution. The plan itself handles future investments and the assets are managed professionally, by either an outside investment company or by the state treasurer’s office.
Another positive benefit of a 529 plan is that qualified family members can have unused amounts of money from the account transferred to them without any tax penalty. This includes spouses, siblings, first cousins, children, in-laws, or parents.
So what are you waiting for? The sooner you get started, the more you can save.
Do you plan on using a 529 plan for creating a college fund, or are you already? Which type do you expect to use?
Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.Learn More