When planning ahead for higher education, the issue of fees will undoubtedly surface sooner rather than later. Tuition, fees, textbooks, room and board, these all cost money, and the costs can add up quickly. Fortunately, there are several options available, and depending on your specific circumstances, the 529 may be the one for you. This article will provide you with some basic information about the 529 plan in order to help you make a more informed financial decision.
What Is a 529 Plan?
A 529 plan is a college-savings plan that provides individuals with a way to allow their funds to grow tax free, provided that these funds are put towards the qualified higher education expenses of the plan’s beneficiary. These qualified expenses include tuition, books, fees, etc, for both Undergraduate and Graduate school. Under Federal law, these 529 plans are known as Qualified Education Plans (Or QTPs) and are subject to the state income tax treatments and regulations for your specific state—which is why it is always best to speak with your certified financial planner for further information before taking this or any important financial planning step.
Who Can Open A 529 Plan Account?
529 plans are available for anyone to open, regardless of income. This is one of the reasons why 529 plans are more widely used than certain other types of college savings plans that have higher income restrictions and initial contribution requirements.
Who Can Benefit From A 529 Plan?
Any beneficiary you wish to designate can benefit from a 529 plan, including but not limited to: friends, children, grandparents, other relatives, or yourself. With a 529 plan, you also have the option of setting up additional accounts for separate beneficiaries.
How Much Can Be Contributed Annually?
Most 529 plans don’t have annual contribution caps per-se, you should be aware that in most states, you will have to pay gift tax if you contribute more than $11,000 annually. However, more than one person is allowed to contribute to the account, so both you and your spouse could make contributions of $11,000 and still avoid gift tax. For some people, (possibly grandparents) who are interested in reducing their estate tax liability, and for anyone who wants to make a large contribution immediately, the 529 allows the option of contributing cash gifts to the beneficiary (indirectly via the plan) as long as each individual amount does not exceed the contribution cap, and provided that no further cash gifts will be made to the beneficiary by this (or these) same contributor(s) over the next five years.
What Are The Types of 529 Plans?
There are two types of 529 plans: State Savings Plans, and Prepaid Tuition Plans.
State Savings Plans:
State Savings plans give you the option of saving money towards future college expenses in an individual investment account. To open a State Savings plan account, you will need to contact the financial institution appointed by your resident state and fill out all required paperwork, including naming a beneficiary for your account. Once it comes time for the beneficiary to use the funds in the account, they will be able to do so at any college in the state or country, as well as some foreign colleges, provided that they are on the list of colleges approved by the US Department of Education. State Savings plans also fall under the category of what are known as Independent Savings Plans, which are available from select financial institutions and individual financial firms like TIAA-CREF.
Prepaid Tuition Plans:
Prepaid Tuition Plans allow you to prepay tuition to the college of your choice in anticipation of future beneficiary use. These types of plans are offered by either state or private institutions, by the states themselves. To combat derogatory effects of inflation, an investment manager is appointed to invest the funds wisely in order to make sure that they are in sync with the current college inflation rates. There are two types of Prepaid Tuition Plans: Contract Plans and Unit Plans.
• Contract Plans: With Contract Plans, the account owner enters into an agreement with their financial institution, who agrees to pay a predetermined amount (allowing for inflation: see above) to a college named in the plan.
• Unit Plans: With a Unit Plan, plan funds can be used to purchase units, or credits from the preferred college which represent a certain percentage of the yearly costs (tuition, etc.) to attend said college.
Contribution Allowances for 529 Plans
By law, total contribution amounts cannot exceed the amount necessary for attendance of the college of choice for the named beneficiary. In most cases, this amount cap is usually set at five years of college attendance and related approved expenses, but each plan is normally allowed to set its own limits in most cases. The maximum contribution amount is chosen by the individual state, and can vary, but $250,000 is the usual.
529 Plan Distributions Not Used for Educational Expenses
Any 529 distribution that is not used for educational expense purposes may be subject to both income tax and a 10% early distribution penalty, except when:
• The designated beneficiary becomes deceased, and the distribution reverts to their estate or to another designated beneficiary
• A designated beneficiary becomes physically or mentally disabled to the point where they are unable to pursue a higher education. Proof a physician is required for this to be valid These are only two examples, and there are other exceptions which can vary by plan and state. Consult your financial institution for details specific to your situation.
Other Beneficiary and Contribution Information To Consider
529 Plan Limitations:
The plan’s lifetime limit is per-beneficiary, and there are no limits to how many contributors one plan can maintain. Keep in mind, though that the contribution cap limitations still apply.
Investing In The Future
Smart financial planning requires informed, well-thought out decisions, which is why it is so important to learn as much as you can about financial planning choices on your own, and meet with your certified financial planner, when you are considering your options.