April 17, 2020
Many parents find 529 plans intimidating because it’s so hard to predict where a child may attend college, what they’ll decide to study, and how much it will cost.
529 plans are a lot more flexible than most people realize, though. You can choose the amount you’d like to set aside from your monthly budget, and there are some tax benefits.
There are two types of 529 plans; prepaid tuition plans and college savings plans. The details of each plan depend on your state of residence.
Here are the basics of each:
College Savings Plan
- No restrictions on when you can open an account
- No age limits on beneficiaries
- Can be used for tuition, mandatory fees, books, computer equipment required by the college, room, and board
- Any accredited institute of higher learning, including state schools, community colleges, trade schools, vocational schools, and some overseas colleges are compatible
- Sponsored by individual state agencies
- Account owners establish a savings plan for a specific beneficiary to pay for their future educational expenses at any college or institute of higher learning
- Money in the account is invested as directed by the account holder
- There’s no residency restriction placed on this type of account
- Money taken out of the account for any reason other than qualifying educational expenses is subject to an automatic 10% penalty and income taxes
While there are many benefits to the College Savings Plan option, a few stand out from the rest.
If your child ends up receiving a partial or full scholarship, you can withdraw an amount equal to the scholarship to use for anything you’d like. You may have to pay taxes, but there’s no penalty.
529 plans never expire. As the account owner, you can change the beneficiary any time and as often as necessary. If one of your children or grandchildren doesn’t use the account, another one can. Since there’s no time limit on when you must use the funds, you can leave it to your great-grandchildren if you’d like.
Anyone can contribute to the account, so if you have relatives that are at a loss for gift-giving ideas, making a deposit to a child’s 529 plan is an ideal option.
Prepaid Tuition Plan
- Plans have limited enrollment period
- Beneficiary has age and grade limits
- Covers tuition and mandatory fees at a participating college. Certain plans allow account owners to buy a room and board option or use excess funds for other expenses.
- Sponsored by private colleges and universities
- Account owners can purchase credits or units at colleges that participate in the program at today’s tuition rate for use in the future
- There is a residency requirement in most cases
Prepaid Tuition Plans are a good bet for families who have a strong tradition at a certain school and feel confident that their children will attend. College tuition is on the rise, and pre-paying the bill could mean big savings down the road.
Both types of 529 plans fall under the “Parent Asset” section of the Free Application for Student Aid (FAFSA) that determines the amount of financial aid in loans and grants that a student gets. Between $40,000 and $50,000 of parent assets are sheltered on the FAFSA, so most 529 plans don’t have a negative impact on the amount of financial aid a student receives.
Adding a small amount of money to a 529 plan out of your monthly budget is a wonderful way to help your child or grandchild avoid the high costs of student debt. The plans are flexible and have many tax advantages, so if you want to help a young person pursue higher education, starting one of these savings plan is a great way to accomplish that goal.
Looking for more savings tips? Check out our helpful guide on The Basics of Saving Money.
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