A college savings plan that should be considered for every child.
A 529 College Savings Plan is something that all new and future parents should consider. Like all investments, time is your most valuable tool. The sooner you start, the more you will accumulate or save. Even before having children, a 529 College Savings Plan is something to learn about as many employers are offering plans to employees as part of their benefits package. It is never too early!
Defining a 529 College Savings Plan is as it sounds, an investment vehicle that allows parents to save for future college education expenses, it is a tax-advantage product and is used for one beneficiary per a plan.
There are 2 primary types of 529 plans. They are known as pre-paid tuition plans, and college savings plan (also known as investment plans). For this post we will talk about 529 College Savings Plan as it is the more popular one.
Contributions to 529 Plan
The way a 529 plan will work is you will make contributions to the plan as the parent and owner of the account. These contributions will be money that has already been taxed. Where and when the money is taxed is the MAJOR advantage to this plan and why all parents should consider it.
The earnings your contributions make in a 529 plan and how they add up are on a tax-deferred basis. Ultimately, when your child is at the age of college and chooses to go to school, any distributions made from the plan are not taxed at the federal level. There is one important factor to remember though. The distributions will not be taxed at the federal level, only and ONLY IF the money is used for qualified education expenses. Now you may ask what qualified education expenses are. Well let’s list them.
Qualified Expenses for a 529 College Savings Plan:
-Tuition and fees
-Room and Board (the amount you expense, can’t exceed the college estimate or amount that is billed if you are living off campus.)
-Technology items such as computer/laptop or software (ex. Microsoft Word)
-Books and Supplies
Non-qualified Expenses for a 529 College Savings Plan:
-Transportation & Travel (ex. student going away and needing to buy plane tickets to go from school to home or vice versa, this does NOT qualify)
-Student Loan Repayment
-Cell phone plans
-Sports club dues
An important thing to remember is that many different states will offer different versions of 529 plans. The reason being is that how state taxes are handled. A unique feature of 529 plans is that you do not have to invest in a plan in the state you live in or even go to school in. Many different states will offer different tax advantages and you are able to take advantage of the one that may fit you or your beneficiary the best. Think of it this way, Live Anywhere, Invest Anywhere, Learn Anywhere. Many states will offer incentives to you for their 529 plan offerings if you live there or are going to be going to school there. This is something you want to pay attention to when the time comes to select a plan. Obviously, you won’t be knowing where your 3-year-old baby will want to attend college, but it is something to keep in mind. The next thing is also important and that is what if you open a 529 plan for your 3-year-old child and 15 years down the road you find out they won’t be attending college.
Child doesn’t attend college? What do I do?
Let’s look at what would happen if your 529 plan beneficiary doesn’t attend college. What can you do? Will you be penalized? Let’s see…. If one of your children doesn’t go to college but the other one does, you can always change the beneficiary without a penalty. Another option, you can withdraw the money with a 10% penalty on the investment returns and then you will also be taxed on any gains during the life of the plan. Also, this may be going backwards but it is an important feature of a 529 plan. The plan can also be used for k-12 schools. There are limits of how much can be considered a qualified expense for k-12 schools, so you want to do your research on that one.
Child receives scholarship, can I still utilize my 529 plan?
Many parents wonder what will happen if my student receives a scholarship, but they have a 529 plan set up for their child. A 529 plan does not affect scholarships of what the student will receive. You will not lose the money, there may be a penalty depending on the situation. Once again, do some research on that and possibly speak with a professional to get a full understanding.
Who maintains control of 529 plan?
The last feature of a 529 plan, the owner maintains control of account throughout the life of the account. The beneficiary will never take over the account nor can they take withdrawals without approval from the owner. Everything is done by the owner/parent of the account.