One of the best ways to save for college education is a 529 plan. This is an investment designed to help save money for a child’s future college expense. Here are the basics.
A 529 plan — also know as a “Qualified Tuition Plan” — is owned by whoever opens the plan: a parent, other relative, or family friend. The child for whom the plan is designated is its “beneficiary.”
You may contribute to a plan even if you aren’t its owner, but the owner controls it. Contributions of up to $14,000/year ($28,000/year for married couples) aren’t subject to federal gift taxes.
529 plans offer other tax breaks — no federal income taxes on what they earn, and many states offer residents state tax benefits on their 529 plans.
One type of 529 plan is a “prepaid college tuition program.” This purchases all or part of the beneficiary’s future tuition at a rate set today so, as tuition rises, it’s already been prepaid at a lower rate.
The other type is a “college savings plan.” Plan managers invest what you contribute. You usually have different investment options, and earnings vary according to the return on those investments. Some college savings plans are riskier than others, so you could end up losing some or all of what you put in if they perform poorly.
When the beneficiary goes to a college covered by a 529 plan, what’s withdrawn from the plan isn’t subject to federal taxes (or state taxes in many states) as long as it pays “qualified education expenses” — tuition, fees, books, class supplies and equipment, certain room and board amounts, and some other college costs.
If the beneficiary doesn’t go to college or use everything in a 529 plan, what’s left may roll over to another beneficiary. This must be a relative of the original beneficiary — a sibling, cousin, niece or nephew, parent, etc.
All states and some colleges offer 529 plans. The earlier you contribute, the more the plan is likely to earn. But be sure to check out any plan you consider for “portability” — the number and locations of the institutions at which the Plan can be used.
To research each state’s 529 plan(s) and how to open them, check out the College Savings Plan Network’s website. For 529 plan information on federal taxes, qualified education benefits, and rollovers see pages 59-62 of IRS Publication 970.
College Affordability Solutions can help your family devise strategies to prepare financially for college. Call (512) 366-5354 or email email@example.com to make contact with us.