Saving for College-529 Plan Basics
Saving for college can seem like a daunting and overwhelming feat. But there are financial avenues to help you accomplish it. One of these tools is 529 plans. In this article, we will go over 529 plan basics so you can determine if it is the right choice for you.
What is a 529 Plan
A 529 plan is an education saving plan to pay for future college costs. The name is based on the Section of the Internal Revenue Code that created the plans. The money you contribute to it can later pay for tuition, books, or other education-related expenses. However, you must attend an eligible school to use these benefits. There are two sub-types of 529 plans. They are:
- Savings Plan: With this plan type your contributions are invested in mutual funds or other similar investments. The value of your account can increase or decrease based on the performance of the investments you choose.
- Prepaid Plan: This plan lets you pre-pay for all or part of the costs of in-state public college tuition.
529 Plan Benefits
Besides helping you save for college, there are other benefits that 529 plans afford. For example, your contributions are not tax-deductible, but they do grow tax-free earnings. Additionally, funds are not taxed when they are taken out to pay for college expenses. However, if funds are withdrawn for other purposes the earning will incur income tax and a 10% penalty.
But contributions up to $14,000 for an individual and $28,000 for a married couple filing jointly will qualify for the annual gift tax exclusion. This may be a tax provision that you want to take advantage of. Also, 529 plans do not have annual contribution limits and do not have restrictions or limitations imposed by income.
Another added bonus is that grandparents and others can also gift money into the existing account, they do not necessarily need to open another one in their name.
Fees and Expenses
Typically, you should expect some form of fees and expenses related to your plan. Each plan’s expenses and fees will be different, so it is important to look carefully into that. Not doing so could cause fees and expenses to eat away at your contributions. Prepaid plans will typically charge enrollment and administrative fees, annual maintenance fees, and asset management fees. The asset management fees may differ depending on the plan investment option you selected.
Educating yourself about the fees and expenses will help you to know what to watch out for and the right questions to ask when contemplating a plan. Doing this will help you save money and maximize your return.
How to Enroll
Now that you understand 529 plan basics you may be wondering how you can enroll in one. To qualify to open a plan you must be a U.S. resident, be at least 18 years of age, have a U.S. mailing address, and have a Social Security Number or Tax ID. Your desired beneficiary must have a Social Security Number or Tax ID.
You can choose to enroll directly with a 529 plan manager. Or you can enroll through your financial advisor. Keep in mind that your financial advisor knows your financial standing and will be able to recommend several plans that fit your needs.
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