When saving money for college, it’s important to learn about all the different options available to your family. Here we will discuss 529 plans: what they are, their benefits, and how you can access a 529 plan for your family.
What is a 529 Plan?
Essentially, a 529 plan is a college savings plan that offers financial and tax benefits. There are two types: education savings plan and prepaid tuition plan. These plans differ from state to state, but most states have at least one option.
Benefits of 529 Plan
They have tax and financial aid advantages
These advantages will vary based on the state and plan you choose. Typically, you won’t have to pay taxes on your 529 plan. It’s important to note that you can open a plan in any state, but sometimes the tax benefits change if you aren’t a state resident. You may want to consult a financial advisor when choosing a 529 plan.
There aren’t a ton of limits
You can start a 529 plan at any time, and anyone can contribute to it. There is no age limit on contributions, nor is there an age limit for using the money in the plan. However, the money can only be used for educational expenses. If the beneficiary decides they don’t want to go to college, the account owner can change the beneficiary. (For example, to a younger sibling or future grandchild).
Friends and family can contribute
Instead of gifting tons of toys for birthdays and holidays, friends and family can contribute to the 529 plan. It’s a true investment on the child’s future, and will save your home from the clutter of toys that have a short-shelf life.
How to Choose a 529 Plan
First, you will decide between a college savings plan or a prepaid tuition plan
A college savings plan works a lot like a 401(k), giving you different investment options to choose from. Basically, you invest money that will hopefully accumulate by the time your child goes to college. Keep in mind, as with all investments, that you are taking a risk. There is a possibility of losing money. Most people choose an age-based plan that decreases risk and becomes more conservative as time passes.
A prepaid tuition plan allows you to pay tuition in advance at an in-state institution. This plan isn’t as popular because it isn’t as common. The last states with guaranteed prepaid tuition plans are Virginia, Washington, Florida, Mississippi, Massachusetts, and Maryland.
Second, check out your state’s 529 plans and compare them to others
Some questions to keep in mind: What will the total expense be? What kinds of fees should I expect? Which investment option is right for me? If I have a question, is the plan manager easily available?
Third, open your account
You can do this with a plan manager or financial advisor. The sooner you open your account, the better. (More time to accumulate funds for your beneficiary!) With the right 529 plan, you can ensure your child will have a bit of money to put towards their college education.
If You Don’t Need All the Funds
If your child receives a scholarship and you don’t need to use all the money in your 529 plan, that’s great! You can withdraw the money you need, and there is no penalty for that. It’s important to remember that the money in a 529 plan MUST be used for educational expenses. There are penalties if you use it for anything else. If there’s leftover money, you can save it for your next child or future grandchild.
Hopefully, with this outline, you have a better understanding of 529 plans and the ways it can help you save for college. For more information, check out this article from the U.S. Securities and Exchange Commission! If you’d like more advice like this, check out our free college planning tool, myOptions.