Planning for your child’s education can feel like navigating a maze of complex financial decisions. Like many parents, you may have heard of 529 plans and wondered if they could help chart the course ahead. Here are common questions — and answers — about this powerful tool.
What exactly is a 529 plan? In short, it’s a tax-advantaged savings account designed to help families prepare for educational expenses, primarily college tuition. Named after Section 529 of the Internal Revenue Code, which governs their rules and benefits, these plans can be a powerful tool for education funding
How does it work? As long as the funds go toward qualified educational expenses, contributions are made on an after-tax basis, enjoy tax-free growth and can be withdrawn without taxation.
What are qualified educational expenses? Qualified expenses can include tuition, fees, books, supplies and equipment necessary for enrollment or attendance at an eligible educational institution. In recent years, the list has expanded to include K-12 education expenses, certain apprenticeship programs and even student loan repayment in some cases. See the IRS website for full details.
Are all plans the same? Each state offers its own version of a 529 plan, with varying benefits, fees and investment options. But only some states offer pre-paid plans that allow you to lock in future tuition costs at today’s rates for in-state public colleges, offering a hedge against rising tuition prices. Savings plans, on the other hand, provide investment options like mutual funds to grow your contributions over time, offering more flexibility for educational expenses.
Who can contribute? Anyone can contribute — parents, grandparents, friends and even employers. This makes it an excellent option for families looking to pool resources for a child’s future.
What if my child decides not to go to college? Life is full of surprises, and plans can take unexpected turns. If the original beneficiary decides not to attend college or receives a scholarship, the 529 plan allows you to change the beneficiary to another family member.
What are the contribution limits? The federal government doesn’t place specific contribution limits on 529 plans. Instead the IRS just notes that contributions “cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary.” At the state level, total limits range anywhere between $235,000 and $575,000. However, be aware of federal gift tax rules, as contributions above the annual exclusion may require reporting.
How does a 529 plan impact financial aid? Funds in a 529 plan are typically treated as a parental asset, which generally has a relatively modest impact on financial aid eligibility. Withdrawals from the plan, however, may count as income for the student, so timing withdrawals strategically can be key.
How do I open a 529 plan? First, research state-specific plans to find one that aligns with your needs. Some states allow non-residents to enroll, so you may not be limited to your home state’s plan. Then visit the provider’s website to set up an account, select your investment options and start contributing.
What if I Have More Questions?
We’ve just covered the basics of what 529 plans can do — for complete details, visit the IRS website. And consider speaking with a Financial Professional, who can help you tailor an education savings strategy to your family’s unique goals and needs.
Sources
https://www.irs.gov/newsroom/529-plans-questions-and-answers
https://www.finra.org/investors/investing/investment-accounts/college-savings-accounts/529-plans
https://www.investopedia.com/financial-edge/0311/the-last-states-with-prepaid-tuition-plans.aspx
https://smartasset.com/student-loans/will-529-plan-affect-financial-aid