It’s graduation season! With the excitement of this major achievement, students have to step into the real world bearing the burden of student loan repayment. Therefore, it’s more important than ever to develop a plan to help pay for your child’s college education as early as possible. May 29th has been designated as National 529 College Savings Day, a day to raise awareness about the value of planning ahead for college expenses with 529 plans. A 529 plan, also known as a “qualified tuition plan,” is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary (typically one’s child or grandchild).
How Do 529 College Savings Plans Work?
Accounts can be opened for any child at any age. You just need their social security number. You can even open one for yourself if you plan on returning to school in the future. Please note that plans can vary by state. There are two types of 529 college savings plans: prepaid plans and savings plans.
These allow individuals to purchase tuition credits at today’s rates to be used in the future. These may be administered by states or higher education institutions. They let you prepay all or part of the costs of an in-state public college education. The investment can also be converted for use at private and out-of-state colleges.
These are similar to 401(k) and IRA accounts. They grow by investing your contributions in mutual funds or similar investments. There are several investment options to choose from. Your account will fluctuate based on the performance of your investments.
What Counts as a Qualified College Education Expense?
- Money from a 529 college savings plan can be used for tuition, fees, books, supplies, and equipment required for study. The money can also be used for room and board, as long as the student is enrolled at least half-time. You can also use it to pay for off-campus housing, up to the college’s room and board costs.
- Qualified education expenses do not include student loans and student loan interest.
- If money from a 529 college savings plan is not used for qualified education expenses, it is subject to income tax and an additional 10 percent early-distribution penalty.
Advantages of a College Savings Plan?
- Withdrawals are tax-free and investments grow tax-deferred.
- Federal and state tax benefits – some states let you deduct a portion of your contributions from your state taxes.
- The person who opens the account remains in control of the account. The beneficiary does not gain control of the money at any specific age or time.
- Automatic investment options – a specified amount of money each month can be withdrawn from your checking or savings account. Also, you can contribute as much as you want.
- If it turns out the beneficiary won’t be using the money, you can change the beneficiary or roll the funds over to a different investment. You can also transfer the money from state to state.
College may seem far off for your child or yourself, but a long-term savings plan can be essential for higher education.