6 Basic Facts You Need to Know About 529 College Savings Plans

25
2176
Cheerful Asian boy smiles while placing coins in a piggy bank. His mother is teaching him about saving for his education. A label on the piggy bank reads 'college.'

If you have had a child (and I’m guessing you do to be reading anything on this site) you know that there are many daunting feelings that come with parenthood. However, one that seems more and more daunting as the years go by is the rising cost of a college education.





My husband and I decided before we had kids that we would like to pay for their college education. We knew that meant that:

  1. We couldn’t have a gaggle of children or we’d go broke.
  2. We would have to figure out how to save in a way that would be impactful by the time our kids attend college.

Our daughter was born in 2012, which means she will be attending college in 2030 when the annual, average cost is expect to be around $45,000 per year according to the United States Department of Education. She and our son will both be in school at the same time for at least one year too.

We have been looking into better options for saving versus just the run of the mill savings account and recently heard about 529 Plans. I wanted to share some of my findings with you on what I discovered about 529 Plans as I imagine you are also panicked about either paying for college or sending your child off to school with loans that will amount to around $200,000 by the time they graduate. So here are the basic facts about 529 Plans that you need to know.

What is a 529 Plan?

A 529 Plan is a college savings plan operated by states or by educational institutions in an effort to help families safe for the cost of college. Its name comes from the 529 section of the Internal Revenue Code, which created the plans in 1996 to help families with the mounting cost of tuition.

More than 30 states provide tax deductions or tax credits for contributions to a 529 Plan. However, contributions do not reduce your taxable income.

There are two main types of plans – a Savings Plan and a Pre-Paid Tuition Plan.

What’s the difference between the two types of plans?

Savings Plans are only offered by states and are similar to IRAs in that they are a way to invest money in education long-term. Plan holders can generally invest in a range of mutual funds, which will attempt to reduce risk exposure as the date of freshman year approaches. The amount that is available for eligible education expenses will be impacted by the rate of return on investments.

Prepaid Tuition Plans are offered by states and education institutions to allow the plan holder to prepay for one or more semesters at designated colleges and universities AT CURRENT PRICES for a fixed period of time or a fixed number of credits. This helps to shield people from the cost of inflation, which has been about 6.5% per year according to the USDE, and the program bears the risk of investments.

These plans will often have caps or residency requirements and are generally stricter about what expenses they will cover. Text books and room and board may not be included in what the plan will cover.



What do the plans cover?

The earnings of a 529 Plan can be used towards all qualifying educational expenses, which includes tuition, books and room and board. Unless you have a Pre-Paid Tuition Plan that limits these expenses to a select few.

Do you need to pay taxes on the money withdrawn?

A 529 Plan is an investment plan and is not subject to federal and (generally) state tax when earnings are used for qualified educational expenses for the beneficiaries. Meaning, when you withdraw the money to use for school you will not have to pay taxes on that withdrawal.

Withdrawals that are not used to pay for qualifying educational expenses are subject to taxes and a 10 percent fee unless there has been a death or disability.



How do you become eligible?

Everyone is eligible for a 529 Plan. There are no income limits, age limits or annual contribution limits. There are lifetime contribution limits that vary by plan.

How is the account managed?

The accounts are typically low maintenance. You can enroll through a website or by contacting your financial adviser. Most plans allow automatic payroll deductions or withdrawals from your bank account. Ongoing management is usually handled by an outside investment firm hired to act as program managers.

Find more ways to save for college here, and find out about common mistakes parents make when saving for college here.

25 COMMENTS

  1. My husband is an accountant and set up the college savings plans for our boys. Hopefully it will mean their student loans will be a little less 🙂

  2. This is such great information! As a military family, we’re going to be going a different route for our son, but if we weren’t military we would definitely need some help with a 529 for sure!

  3. It is never too early to start planning. My husband and I are up to our eyeballs in student loans from his medical school education. I would love to have some money set aside if our kids wanted to follow in his footsteps to help reduce the burden on them after they graduate.

  4. This is a great post. It is never too early to start saving for secondary education. Student loans are not fun to pay off. Helping alleviate that is something that most families are able to do. We have similar education savings plans here. We need to open one for our youngest still, as we are a little slow in the game this time around.

  5. This is great, we are always looking for ways to save for our kiddos college. With four little ones we need all the saving, we can get. Thanks for sharing.

  6. This is a great read! Defiantly for something I was looking for. It’s so hard to decide what accounts are best but this made it easy 🙂

  7. I’ve been planning to do this for my boys for a long time. My parents had college funds for my brother and I, and it was amazing! This is a great post for parents!!!!

  8. This is so fascinating me. My husband and I plan on helping out with our nephews and nieces college education (as we aren’t having children) but we haven’t had a clue on how to start. This is something I can take to my sisters and chat about.

  9. It’s really important to consider these things the moment you think about starting a family. There’s nothing better than planning for a good future for your kids! I think this post is very informative.

  10. We’ve already started saving for all of our 7 little ones and their future. It’s oh so important and I think it’s a great idea to look into plans like these!

  11. I really like that this plan allows you to use your funds on things outside of just tuition. College costs so much but when you have a plan for only tuition you forget about all those other big expenses.

LEAVE A REPLY

Please enter your comment!
Please enter your name here