529 Plans: College and Graduate Savings

529 Plans: College and Graduate Savings

A 529 plan is a college savings plan which offers benefits tax and financial aid. In addition to the college costs, 529 plans are sometimes used to save and invest in K-12 tuition. There are 2 kinds of 529 plans: college savings plans and prepaid tuition plans. There is at least one 529 plan in almost every state. There is also a 529 plan controlled by a group of private universities and colleges.

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How Does a 529 Plan Work?

While 529 plans take their name from Section 529 of the Federal Tax Code, the plans are administered by the 50 states and Columbia District.

Everyone can open a 529 account, but they are typically set up on behalf of a child or grandchild by parents or grandparents who are the beneficiary of the account. In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.

The funds in the account continue to grow until it is withdrawn on a tax-deferred basis.

Those withdrawals are not subject to either state or federal taxes as long as money is being used for qualified education expenses as defined by the IRS.

Tax-free withdrawals for K-12 students are limited to $10,000 per annum.

Can You Use a 529 Plan For Any College?

You can invest in any 529 plan of the State, not just the 529 plan of your state.

529 Plans may be used to cover college expenses at any national level qualified college.

In several plans, the State that sponsored your 529 college savings plan does not affect your college choice.

You can be a resident of California, invest in a plan for Vermont, and send your student to the North Carolina College.

More than 6,000 U.S. colleges and universities, and over 400 foreign colleges and universities, can use your 529 plan. Check if your institution qualifies under 529 rules.

Tax Benefits

The Federal tax law provides special tax benefits as long as the plan meets a few necessary standards, such as 5-year gift tax averaging and tax-free qualified distributions.

Some states also offer investors state income tax incentives, such as deductions from state income tax and tax credits for contributions to the 529 plan of the state.

Study and explore the tax treatment of your State.

Cons

  • You can only use the funds for Education
  • Restrictions on state tax benefits
  • No self-directed investments

Types of 529 Plans

529 plans are usually categorized as either prepaid tuition or college savings plans.

  • By investing your after-tax contributions in mutual funds or similar investments, College Savings Plans work much the same as a Roth 401(k) or Roth IRA. The 529 college savings plan offers several investment options for choosing from. The 529 plan account will increase or decrease in value according to the performance of the investment options.
  • Prepaid tuition plans allow you to prepay all or part of the cost of public college education in the state. They may also be transformed to private and out-of-state colleges for use. The Private College 529 Plan is a separate private college prepayment plan, sponsored by more than 250 private colleges.

Other Considerations

As with other types of investments, the better the earlier you get started. With a 529 savings plan, you'll have more time to grow and compound your money.

You will most likely be able to secure a lower tuition rate with a prepaid tuition plan, as many schools raise their prices each year.

If you have money left over in a 529 plan — say the beneficiary gets a substantial scholarship or decides not to go to college at all — you will have several options for it.

One is to change the beneficiary into another relative on the account. Another is to keep the current beneficiary in case they change their minds about going to college or graduate school later on.

If it gets worse, you can always cash into your account and pay taxes and a penalty of 10 percent.

A common way for the college to save and invest is through a 529 plan. Historically, these plans have allowed you to set aside money for qualified education expenses such as college tuition, fees, room and board, and computers, as well as other equipment.

Now, they can also be used earlier in your child's life for qualified education expenses.

Take the time to investigate each option, dig into the tax incentives and fee details, and work with our expert to make the right choice for your situation.

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Infinity Financial Network are not tax professionals. Please consult an appropriately licensed tax professional for all tax related matters.