529 Plan Frequently Asked Questions

A 529 plan is a type of education savings plan. It comes with certain tax advantages. But often these plans are not used to the full. In this article, we will go over 529 plan frequently asked questions to help you better utilize these plans.

1. Who Can Utilize a 529 Plan and What Can the Plan Be Used For?

Any student in your family, including yourself, can benefit from a 529 plan. The funds can be used for several different purposes, all educational. These purposes include college or post-secondary education, tuition for public, private, or religious elementary or secondary schools. 529 plan funds can also be used for some expenses for registered apprenticeship programs and qualified education loan repayments up to $10,000 per beneficiary.

2. When Should We Start a 529 Plan?

The earlier you start saving the better. Just be sure such contributions fit into your financial situation and goals. The longer your money is invested, the more time it must grow. It is important to note that these are tax free earnings. You will lose some of the benefits a 529 plan offers if you withdraw the money soon after you contribute it.

3. Do I Have to Use a 529 Plan, or are There Other Ways to Save?

Aside from a 529 plan these are a few other education savings plans you can utilize as well. These include Coverdell Education Savings accounts, Uniform Gift to Minors Act accounts, Uniform Transfer to Minors Act accounts, tax-exempt municipal securities, and savings bonds. You may also choose to use a taxable investment account as your savings vehicle. There are advantages and disadvantages to each of these accounts. It is important you weigh them and consider potential effects on financial aid.

4. Should I Use a 529 Education Savings Plan or a 529 Prepaid Tuition Plan

Education savings plans tend to be more flexible than prepaid tuition plans. But they both have their advantages and disadvantages. Education savings plans do not have residency requirements; they offer different investment options and can generally be used at any college. They can also be used for tuition for elementary and secondary schools, some expenses incurred by participation in registered apprenticeship programs, and qualified loan repayment up to $10,000 per beneficiary. With a prepaid tuition plan you purchase credits for the beneficiary to use at participating colleges. It allows you to save for future tuition and fees at today’s rates.

5. Which Plan Should I Choose?

There are many subsets of 529 plans you can set up. When you are looking, compare their rates. As well as the number of different investment options that they provide. Start with plans specific for your state you reside in as they may offer tax incentives for residents.

6. How Do I Pick My Investment Options?

It is a good idea to allocate funds into several investment options, not just one. You will need to consider fees, risk, and potential return. You should also take time to periodically review and reallocate your investments. You can do this twice a year or anytime you change a plans beneficiary.

7. How Should I Fund the Account?

Many 529 plans have minimum deposit requirements to open the account. They may also have a minimum requirement on secondary deposits. Also take into account if your state is offering tax benefits for your contributions, as these often come along with limits. Your account may also have a lifetime total limit on contributions.

8. What Happens if My Beneficiary Does Not Use All the Funds in the Account?

If 529 plan funds are not used for educational purposes, you can withdraw the funds, but they are subject to income tax and a 10% penalty. You also may owe state tax if you claim a deduction or credit for your contributions. However, if your beneficiary received a scholarship they can withdraw up to the amount of the scholarship without penalty. Another option is to change the beneficiary on the account or transfer the assets into another 529 plan. You also have the option the rollover the remaining funds into a Roth IRA. But this is subject to current contribution limits. The account you are transferring from must be at least 15 years old and the funds you are going to roll over must have been in the account for at least 5 years.

Setting Up a 529 Plan

If you feel that a 529 plan is right for your family, meet with an investment advisor who can go through the options and help you set one up.

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