Although “529” or “529 Education Savings Accounts” are officially a tax-advantaged, postsecondary-education savings plan, you may be surprised to learn that they can actually be used for a wide range of education expenses, including things like tuition, books, and even student transportation.
Education-Saving Accounts, or “529” accounts, have become incredibly popular among families with children to save for future education. According to estimates, parents will deposit about $2.1 trillion into 529 plans in 2018, up from $1.7 trillion in 2016. The primary benefits of 529 plans are that they allow families to put away money for college in a relatively tax-free way. They also offer a tax-advantaged way to save for K-12 education, which can be an especially great plan for families that can afford to save a lot more money.
529 Plans have drawn a lot of attention since their inception in 1996, but what exactly is a 529 Plan? What are the benefits and drawbacks? What are the rules? And what are the chances of one working for you?
Education savings accounts, known as 529 plans, can be confusing. Parents know they have tax advantages. But what exactly are the advantages? What are the best investment options? Which costs are eligible and which are not? Faced with so many questions, many parents don’t even bother. To clear up the fog, below are answers to frequently asked questions about 529 plans. There are two types of 529 plans. A more common type is the 529 education savings plan, in which parents, grandparents, and others can invest money to be used for eligible beneficiary education expenses. A less common type is the 529 prepaid tuition program, offered by some states and a consortium of private higher education institutions, which allows parents, grandparents and others to prepay tuition to participating institutions at a price set today. Some states offer both types of plans. – What are the benefits? Contributions to 529 plans are not federally tax deductible. However, many states offer income tax deductions or credits. Your money grows tax-free and payments for tuition and other eligible expenses are not subject to federal income tax and, in most cases, state income tax. These plans can be used to pay for a range of college expenses, including tuition, room and board, books and computer equipment, and can even be used to pay up to $10,000 per year for K-12 schools. There are many investment options and plans to choose from. You can also transfer money from the account to other recipients. There are many plans that make it easy for people to invest even small amounts, and many low-cost plans with direct sales (without going through an advisor). – Are there any drawbacks? There are more advantages than disadvantages, but consider that you may face tax consequences and/or penalties for withdrawals that are not qualified expenses. Another consideration: Your child’s financial aid for college may be reduced. (More information on these topics follows below). In addition, you can’t buy individual stocks in a 529 plan, and while there are many investment options, you have fewer choices than if you built your own portfolio.
Share your ideas
Does your financial planning for 529 University include? How did they work for you? Join the discussion below. – What can this money be used for? Money from 529 plans can be used for a bachelor’s or master’s degree at most colleges and universities in the United States. You can even use these funds for specific schools outside the United States, according to the College Savings Plan Network, which provides information on 529 plans. – What are the investment opportunities? There are a lot of them. In general, a portfolio allocation is chosen that automatically becomes more conservative as the beneficiary approaches university age. Other options include stock or bond funds, mixed funds that focus on a specific mix of stocks and bonds, and stable value funds that focus on protecting your capital. Some states offer FDIC-insured bank options, including savings accounts and bank certificates with relatively high interest rates, to protect your principal. Nor do they adhere to any particular investment. You may transfer all or a portion of the funds in your account to another investment option twice per calendar year or after a change of beneficiary. In addition, you can choose a different investment option each time you contribute to the plan. You can also switch to another state plan once in a 12-month period, although some states penalize these transfers from their plans. – Is there a limit to the amount I can invest? According to Savingforcollege.com, each state sets its own total contribution limit per beneficiary, ranging from $235,000 to $542,000. Once an account reaches these limits, no further contributions can be made, but profits can continue to accumulate. While there is no limit on annual contributions, keep in mind that contributions are considered gifts for federal tax purposes. By 2021, you will be able to donate $15,000 per donor per beneficiary without paying federal gift tax. You can also make a one-time, tax-free contribution of $75,000 to the 529 plan and spread it evenly over your tax returns over the next five years, which some grandparents use as an estate planning tool. – How do you find a plan? You can compare state plans at the College Savings Plans Network or at Savingforcollege.com. Always check your state’s plan first to see if there are any tax breaks or other benefits that apply specifically to residents that make it a more attractive option. There are also 529 plans sold by advisors for those who want professional investment advice, but they tend to be more expensive than plans sold directly. – Who can open a 529 fund? Almost anyone can participate in a 529 plan. Parents, grandparents, other relatives or family friends may own or contribute to the account. You can even set up a 529 fund for your own education expenses. A trust, corporation, nonprofit or government agency can also open an account in many states. The beneficiary must be a U.S. citizen or resident alien and have a Social Security number or a federal tax identification number. – How does the 529 plan affect financial assistance? Despite the potential consequences, experts say the benefits of saving for college through a 529 plan will likely outweigh the impact on financial aid. Balances in accounts owned by a dependent student or parent are considered parental assets for federal financial aid purposes, and generally only 5.64% of the account is included in the Free Application for Federal Student Aid (Fafsa) calculation each year. According to Savingforcollege.com, this is cheaper than counting them as student assets. Distributions under this ownership structure do not reduce eligibility for financial assistance from the College. (Balances in grandparents’ accounts don’t affect the Fafsa, but their distributions are considered student income – at least until the new simplified Fafsa for 2023-24, which uses 2021 tax returns, stops asking about these 529 accounts.) – What happens if you don’t use all the resources in the plan? Some parents worry about what will happen if their child doesn’t go to college or if the money in the 529 fund is needed for something else. The owner of the account retains control of the assets regardless of the age of the beneficiary. This means that the beneficiary can be changed at any time, for example to another family member. B. Sibling, son-in-law or daughter-in-law, adopted child, cousin, aunt or uncle. You also have the option of withdrawing all or part of the money for something other than qualified educational expenses. However, you can be fined for this. Withdrawn income (but not premium amounts) is subject to state and federal income tax and a 10% penalty tax. In addition, the plan may impose fees or fines.
Federally funded investment plans, known as 529 plans, derive their name from section 529 of the Internal Revenue Code. They are called formally qualified training programs. Tax Benefits : This means that money in the 529 fund grows (usually by holding it in mutual funds) without federal income tax, and you pay no tax on withdrawals when they are used for eligible education expenses. The two types of 529 plans are prepaid tuition plans (where you buy future tuition at a fixed price) and savings plans, where your money grows in the markets. The account holder can open an account for any student or prospective student – the beneficiary. Parents and grandparents often maintain these accounts for the beneficiary or contribute to accounts opened by others. The 529 plan is now commonly called an education savings plan instead of a college savings plan because the 2017 tax law expanded the mandate to include tuition at a public, private or religious elementary or secondary school. Sources: College Savings Plan Network, Institute of Investment Companies Ms. Winokur Munk is a writer from West Orange, New Jersey. He can be reached at firstname.lastname@example.org. Copyright ©2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8A 529 education-savings account (also known as a 529 plan) is a tax-free, investment-based college savings plan that offers tax benefits, including tax-deferred growth and tax-free withdrawals. These plans have grown in popularity over the last few years, especially among younger investors, as they offer a tax benefit and provide low-cost investment options for compound growth and tax efficiency for the long-term, with virtually no fees.. Read more about 529 plans by state and let us know what you think.
Frequently Asked Questions
Why is a 529 plan a bad idea?
You may have heard the term “529” thrown around, but you’re probably not quite sure what it means or how it differs from other types of 529 savings plans. In short, 529 plans are investment vehicles that enable you to save a portion of your tax-free income for educational expenses. Not only do these plans allow you to save on taxes, they also allow you to take advantage of tax breaks on your contributions. The name “529” is often confused with the popular “529 Plans” that are available in states like Florida. These plans are in fact different; they are often referred to as a “savings plans” because they are different than the types of retirement accounts that are typically called “401k” plans. A 529 differs from a 401k in that it is not a type of retirement plan, but rather a way to save for higher education.
What are the disadvantages of 529 plan?
If you’re in the market for a new college plan, you’ve probably heard of both the 529 plan and the Coverdell Education Savings Account (ESA), but what do they really have to offer? A 529 savings plan, also known as a college savings plan, is a type of education savings plan that allows parents to save and invest money for their children’s future. 529 plans, which are usually funded by a state or federal government, are very similar to private education savings plans, such as the Coverdell Education Savings Account or the Education IRA.
What happens to 529 if child does not go to college?
Individuals who have children and have the means to save for their child’s college education might want to consider the benefits of an “529” education-savings account. Although they are called “529” education-savings accounts, any account titled as such is considered an “529” account for federal purposes. If you are thinking of saving for your child’s college or another educational expense, you should check out “529” education-savings accounts. If your kid doesn’t go to college, you may think your 529 education savings plan is worthless. But that’s not the case. Your child may still get a college degree and earn money later in life, so it’s not a completely wasted investment.
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