College can be very expensive, which is why it’s important to plan in advance for yours or your child’s college education. 529 college saving plans are just one way in which you can ensure you will be able to afford college when the time comes.
What is a 529 College Saving Plan?
A 529 college saving plan is a tax-advantaged investment method for residents of the United States to help encourage saving for the purpose of higher education for a given beneficiary.
There are two types of 529 college saving plans – prepaid and savings. Prepaid 529 college saving plans allow people to buy tuition credits at today’s cost and use them in the future. This means that the performance of the 529 college saving plan is related to tuition inflation rates.
Savings 529 college saving plans differs in that they are based on the market performance of underlying investments, which generally consist of mutual funds. The majority of 529 college saving plans have a range of aged-based asset allocation options that mean the investments become less significant as the beneficiary becomes closer to college age.
The savings type of 529 college saving plans can only be administered by states, whereas prepaid 529 college saving plans can be administered both by the state and higher education institutions.
What Can 529 College Savings Plans be used for?
Once a student starts to attend a higher education institution, the 529 college saving plan funds can be accessed.
The money can be used for tuition fees, other fees, books, supplies and equipment that are required by the specific course that the student is taking.
529 college saving plans funds can also be used to put towards room and board, but only if the student is a minimum of a half-time student. If the student wishes to stay in off-campus housing, then the 529 college saving plan can be put towards a value of up to the allowance for room and board that the college lists in its cost of attendance outline.
Any funds from the 529 college saving plan that are used towards any costs that are not listed in the qualified educational expenses list are subject to income tax as well as an additional 10 percent early-distribution penalty fee – unless there are outstanding reasons such as if the student becomes disabled.
The 529 college saving plan has a great range of advantages. The first advantage is that the donor of money to the 529 college saving plan is in complete control of the account. The named beneficiary has no rights to the funds – and the donor is able to reclaim all of the funds put into it at any time subject to income tax and a 10 percent penalty fee.
All funds in 529 college saving plans are not deductible from the donors income tax liability, and several states also provide state income tax deductions for all funds within the 529 college saving plan.
A great advantage of 529 college saving plans are that they are very easy to manage. They can be set up very quickly using a once-off simple enrollment form and you can organize for direct deposits to be made from your account. The handling of the 529 college saving plan is done entirely by the plan and not by the donor.
The final key advantage of 529 college saving plans is that they are open to everyone – regardless of age or income. Additionally, the maximum amounts that can be put into the account are very high – often up to $300,000.
