For most people, a 529 College Savings Plan will be the most efficient vehicle to save for your children's college expenses.
What is a 529 plan?
A 529 plan is an investment account that you can use for education savings. The plans are usually sponsored by states and offer great tax benefits.
Qualified tuition programs, also referred to as 529 Plans, are perhaps the most talked about college-funding vehicles, and there are many good reasons for this.
There are two types of qualified tuition programs:
We’ll focus on the Investment Program, or 529 College Savings Plan as it will be referred to from here on out.
Every state, with the exception of Washington and Wyoming, offers a 529 College Savings Plan.
What are the benefits of a 529 plan?
There are also no income restrictions in place on this type of savings vehicle, so even ultra-high-income people can invest in them.
Thirty-three states currently provide for a state income tax deduction equal to contributions made to the plan up to a certain limit, which is usually dependent on the tax filing status of the client.
You need to consider the investment options available within each plan to determine if the benefits of tax-deferred growth, tax-free distributions, and state tax deductions for contributions are big enough to compensate for higher investment expenses and plan fees when compared to investing in other alternatives.
Most 529 College Savings Plans also provide age-based portfolio models as an investment option that gradually increases the allocation to cash and fixed-income investments as the children get closer to attending college.
It’s important to review the plan holdings annually since not everyone invest in these age-based models, and you may find that the plan is currently invested in assets that are too risky or not risky enough given the risk tolerance and the time horizon associated with your education-funding goal.
What are the qualified education expenses of a 529 plan?
You can use the money for qualified higher-education expenses, including tuition at a college, university, trade school, vocational school, expenses necessary to participate in apprenticeship programs. This includes room and board, fees, books, supplies, equipment, computer hardware and software, and internet access and related services.
Qualified education expenses also include payments of student loans for college, university, trade school, vocational school, or apprenticeship programs (up to a $10,000 lifetime limit per beneficiary).
You can also use your 529 assets for K–12 tuition of up to $10,000 / student per year at a public, private, or religious school.
Who is eligible for the funds in a 529 plan?
Eligible recipients of a 529 plan include a child, grandchild, other family member, as well as yourself.
You can also save for an unborn child and transfer the account from yourself to your child once they are born.
Who controls the funds in a 529 plan?
Because you are the account owner, you (not your child) have control of when and how the money is spent, even after the person you are saving for becomes an adult.
Can I invest the money in a 529 plan in the stock market?
Yes, most 529 plans allow you to choose from a variety of portfolios that have stocks, bonds, and international exposure, giving your money plenty of opportunity to grow tax-deferred.
Can I withdraw the money in a 529 plan early in the event of an emergency?
If something comes up and you really need the money for purposes other than education, you can withdraw it. You might have to pay a penalty, but you will not pay a penalty on the amount you originally invested.
What happens to the money in a 529 plan if my kids do not go to college or get a scholarship?
If you end up not needing the money for whatever reason, you will still be able to withdraw the money. You will have to pay income taxes on the growth of the investments, as well as a 10% penalty on the growth of the investments for withdrawing it for non-educational expenses. One thing to note is that in the event of a scholarship, the 10% penalty will usually be waived.
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