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Home / Investment / What You Should Know About a 529 College Savings Plan

 

For most American families, saving for college is a necessity, but a huge strain. Some try putting X amount of dollars into a standard savings account, other use different tactics, but few are using a 529 plan. If you are asking yourself what a 529 plan is, you are not alone. According to a survey by investment firm Edward Jones, less than 30 percent of Americans know what a 529 plan is. That is unfortunate because it may be the best way for you to prepare for your child’s college years. Here are a few things that everyone should know about a 529 college savings plan.

What is a 529 plan?

It is always good to start with the basics, so a 529 plan is: typically sponsored by a state and is designed for the sole purpose of saving for a loved one’s college expenses. The person who opens the account(usually a parent or grand parent) is the account owner, while the loved one is considered the beneficiary of the account; however, you can name yourself the beneficiary if you plan to attend college in the future. An account owner will be given a number of funds to choose from. These accounts ”range from fixed-income portfolios to equity-based portfolios to age-based tracks that are designed to become more conservative as a beneficiary gets closer to college”, according to Abby Harper, a spokeswoman for Upromise by Sallie Mae.

Benefits of a 529 plan

  • The benefits of using a 529 plan to save for college include:
  • Tax exempt earnings…no matter how fast your money grows, it is exempt from federal and state taxes. Even when the plan is ”cashed out” the money is free from those taxes as long it is used for qualified educational expenses.
  • Some states offer an income tax deduction for 529 contributions, while others offer a tax credit.
  • You can contribute up to $200,000 per beneficiary per year. You must keep your contributions under $14,000 to avoid the dreaded gift tax, however.
  • You can change the beneficiary at any time. This is great for a few reasons. The first is if one child does not go to college. The second is that if, by some miracle, one child does not need all of the money you have contributed, then you can give the balance to another child tax-free.

What if No One Goes to College?

That can happen. College is not everyone’s cup of tea. In that case, you can withdraw all of the money, but you will be taxed heavily on your earnings. Harper explains, ”If you withdraw from your 529 for non-education-related expenses, your earnings are subject to federal income tax and a 10 percent federal penalty as well as state and local income taxes; however, the 10 percent penalty may be waived if the beneficiary dies, becomes disabled, or receives a scholarship.”

What is the Downside?

There is always a downside. These are investment funds and; as such, are not guaranteed. It is possible to lose all of your investment. While that scenario is very unlikely, it is possible. Every investment should be considered carefully. To help you evaluate a 529 plan, you can call your local investment firm and check out this set of FAQ on the IRS website.

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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