529 education plan
A 529 education plan is an easy and successful way to save for your children's higher education. With a 529 education plan, there are two options available; a prepaid plan or a savings plan. With a prepaid plan, tuition credits are purchased at today's prices for use in the future. A savings plan allows the user to pay for investments towards future educational expenses.
Most of these investments are held until the beneficiary reaches a certain age, usually eighteen. When the child reaches the age, the investments are sold to pay for their higher education. States or higher education institutions can administer a prepaid plan, while a savings plan is administered only by the state.
One benefit of a 529 education plan is that the money spent is tax exempt, meaning that no taxes are paid on the money for the plan. The money will remain tax-free for the duration of the plan as well. Another advantage is that the account holder stays in control of the plan, even after the beneficiary turns the designated age. With some programs the beneficiary can withdraw money from their account to pay for non-school related expenses, but this cannot happen with a 529 education plan. And if the named beneficiary does not attend college for whatever reason, the plan can be put into another student's name, guaranteeing that the money will not go unused.
With some 529 education plans, the student can use the money for anything related to higher education expenses including a dorm room, meal plan, food, and even a computer as a necessary supply for school. In relation to taxes, the student can be exempt from paying taxes on the money if the amount is less than $60,000 when received or less than $120,000 if they are married when the money is used. Another significant advantage to a 529 education plan is that the money is protected even if the account holder files for bankruptcy. With some savings plans, the money can disappear during a bankruptcy filing, but not with a 529 education plan. Moreover, for those that think they cannot afford a 539 plan, there are extremely low monthly payments available.
The major disadvantage to a 529 education plan is that they do have high fees, which may mean that you save less money than you would with a normal savings account. Depending on your state, you may have lower interest rates, or faced with more restrictions on how the money can be used.
Using a 529 education plan can be an easy way to pay for your child's higher education, because it allows you to save gradually over time rather than pay one large sum when they first walk onto campus.
Your state may offer substantial state tax incentives and other benefits for choosing one of its 529 education plans and 529 college-savings plan. The sooner your money is in an account, the sooner it starts to earn tax-free returns. One of the best things about 529 accounts is that you can get started with a minimal investment.
31 states plus the District of Columbia offer residents a tax deduction or credit for contributing to their state's own 529 education plan. Kansas, Maine and Pennsylvania even let residents take the deduction for out-of-state 529s as well. The name comes from the section of the federal tax code that allows them to offer significant tax benefits.
With a 529 savings plan, earnings accumulate tax-free and withdrawals can be made tax free, when it's time to pay for a child's college expenses including tuition, books, and room and board. Money from a state-sponsored college savings plan can be used to pay for educational expenses at any accredited college or university.
Many plans allow anyone - from any state - to contribute to a 529 education plan. If you start a 529 account for your child in your home state, grandparents or even friends can contribute to it, even if they live across the country.
What happens if your designated beneficiary decides not to go to college?
A parent has three basic choices:
Hang on to the savings plan
Transfer it to another family member
Cash out and pay a penalty
You can keep the 529 education plan in case the beneficiary decides to attend university at a later date. Another great option is that you can transfer the account over to another family member.
Cashing out the plan is another option, but it comes with a penalty. Most states collect of 10 percent of the earnings on any withdrawal not used for educational purposes.
A federal penalty equal to 10 percent of earnings will be charged as well. No penalty will be assessed if a beneficiary should die or become disabled.
While the tax-free withdrawals looks good, some families may be better off if financial aid is a consideration. Participating in a 529 education plan affects a family's eligibility for financial aid.
Some financial experts advise lower-income families, who are likely to receive a large amount of financial aid, that 529 education plans are not for them because having a 529 savings plan may reduce the amount of aid you can receive.
529 education plans may make the best advice for upper-income families who will not qualify for financial aid and for middle-income families who only qualify for loans.
It is important to understand all fees associated with a 529 education plan so that the fees don't cancel out the earnings of participation in the plan. Look at enrollment fees and management fees.
Look at the details of enrollment and related fees because some states actually waive fees to in-state residents or for people who can keep large account balances.
Each state offers different plans, so you will want to look at your own state plans before looking at attractive plans from other states.
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