Introduction to 529 Plans - College Saving Plans
A 529 plan is a college savings plan designed to help parents and students save for future college costs. These plans are also known as “qualified tuition plans,”. All fifty states and the District of Columbia have at least one 529 plan and are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans:
- Pre-paid tuition plans
- College savings plans
What are the differences between pre-paid tuition plans and college savings plans?
Features of Prepaid Tuition Plan:
1. Locks in tuition prices at eligible public and private colleges and universities.
2. All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.
3. Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.
4. Many state plans guaranteed or backed by state.
5. Most plans have age/grade limit for beneficiary.
6. Most state plans require either owner or beneficiary of plan to be a state resident.
7. Most plans have limited enrollment period.
Features of College Savings Plan:
1. No lock on college costs.
2. Covers all "qualified higher education expenses," including: Tuition, Room & board, Mandatory fees, Books, and Computers
3. Many plans have contribution limits in excess of $200,000.
4.No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value. Members can invest in stock market, mutual funds and other investments.
5. No age limits. Open to adults and children.
6. No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
7. Enrollment open all year.
How does investing in a 529 plan affect federal and state income taxes?
Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. You should consult a Tax Advisor before starting a plan.
What fees and expenses associated with a 529 plan?
Fees and expenses vary from plan to plan. You should consult the plan circular to learn more. Certain state sponsored plans have no fees. Certain institution sponsored plans may have a very low fee.
What other things should I consider or keep in mind?
1. Are you looking to get Financial Aid? If yes, then a 529 plan may reduce the amount of aid you are eligible for.
2. Do not invest in a 529 plan at the expense of your 401K. Your 401k is more important as you child can always get a financial aid or a student loan.
3. Learn about all the fees and restrictions before selecting a plan.
529 Plans by State
As mentioned above, ever state including District of Columbia sponsors a 529 plan. You can learn more about your state's plan by selecting your state below: