Do You Know What A 529 Plan Is?

A 529 college savings plan is a state sponsored program created by the government also referred to as a qualified tuition plan. These programs are mostly sponsored by individual states which allow anyone to contribute after tax dollars into an investment account where the money grows federally tax free. The earnings and withdrawals from the account are federally and in some cases state tax free as long as the money is used towards paying for qualified education expenses (that qualifies under federal guidelines).  The common acceptable expenses are tuition and fees, books and supplies required by the school for enrollment, room and board costs. Each plan varies from state to state and some states even offer their residents/taxpayers benefits like tax deductions and gift matching on contributions. Read on to learn about the Pros and Cons of 529 college savings plans…

PROS

• Anyone can contribute to these plans
• There are no income limits or restrictions
• No age limits or restrictions
• You can make small or large contributions
• Since these are state sponsored plans there may be a state income tax deduction available
• Simple hassle free investments offered (age based investments)
• You can change the beneficiary (future student) on the account
• Tax free growth and withdrawals for college expenses
• Low impact on financial aid eligibility
  

CONS

• Investment Risk-These accounts are not FDIC insured or guaranteed, so there is a possibility to lose some of your earnings and initial contributions.
• Potentially high expenses/fees
• If you don’t use the money for qualified college expenses you pay a 10% penalty tax to the Federal Government as well as ordinary income taxes (federal and most times state taxes)

There are also 529 Prepaid tuition plans. These programs are also sponsored by states but also by a variety of educational institutions throughout the U.S. These plans able you to lock in today’s tuition rate to use for future education expenses. You purchase units or education contracts with after tax dollars through a lump sum purchase or installments. When you need to make withdrawals for college you can redeem the units to pay for qualified college expenses and the earnings that has accumulated is also free from federal income taxes if you use the money for qualified college expenses.  There are also some benefits such as possible state tax deductions available with these programs.