Saving for College: What is a 529 Plan?

Planning & Saving
on October 1, 2012

College expenses have experienced dramatic climbs in the last two decades. People once complained about tuition rates that increased by a few percentage points every year. Now, it is not uncommon for college tuition expenses to increase by a minimum of ten percent or more every year at the same school. Federal legislation has permitted the IRS to design a tax-advantaged savings plan that can help parents to save money for their children’s education. This is known as the 529 plan.

What Is a 529 Plan?
There are two kinds of 529 college-savings plans. The prepaid savings plan allows parents to buy tuition credits for the future at present rates. The basic savings plan is simpler and just grows based on the performance of mutual funds in which it is invested. Both are tax-advantaged because withdrawals are not taxed as long as they are used for educational purposes. These purposes include room and board but it is required that the recipient of this aid be at least a half-time student.

• Prepaid plans may be administered by both state and/or college institutions. They are tied to the rate of the inflation of tuition.
• Savings plans offer allocation adjustments which channel the finds into more conservative investments over time.

Advantages of the 529 Plan
• Contributions to the fund are tax-deductible on the state level in many of the United States.
• The contributor to the fund retains control rather than the beneficiary. This allows parents to make advantageous decisions with their money without jeopardizing it by putting it in someone else’s control. The 529 plan is meant for one person’s benefit but remains in the control of another.
• 529 plans are user friendly. Once they are set up, contributors can arrange to have regular deductions made from their earnings or their accounts without having to plan investments.
• Though the contributor can withdraw funds for personal use, adjusted by a fee and taxes, the funds are not considered part of the contributor’s estate. Thus the funds are not subject to an estate tax should the contributor die.
• Finally, the funds are excluded from examination when institutions and other entities review a student for financial aid. Thus the student may qualify for much more aid even though his or her finances are potentially better than the might seem.

Disadvantages of the 529 plan
• The 529 plan is not able to utilize all available investment vehicles in its portfolio, though the number of possibilities is growing.
• Unlike 401(k) plans and others, you can only make one reallocation of assets per year with the 529 plan.
• Any funds withdrawn and spent on non-college expenses are subject to fines and taxes.

How to Enroll in a 529 Plan
The easiest way to enroll in a 529 plan is by visiting your bank. They can handle all of the arrangements for withdrawals and can verify that you qualify for this fund. It is also possible to enroll online or through the mail. You will be assigned a plan administrator.

The options with a 529 plan make it worth the investment. You avoid the penalty of some taxation while saving for higher education. Should you or the aspiring student decide to do otherwise with the funds, you remain in charge of the funds and can transfer them or withdraw them according to certain rules.

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