529 Saving Plan
What is a 529 Plan?
Rather than applying for a student loan, a 529 Plan is a good way to start. It is an educational savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. As long as the plan satisfies a few basic requirements, the Federal Tax Law provides special tax benefits to you as the plan participant.
529 plans are usually categorized as either prepaid or savings, although some have elements of both. Every state now has at least one 529 plan available. It is up to each state to decide whether it will offer a 529 plan, or more than one, and what it will look like. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan. The private college Independent 529 Plan is the only institution sponsored 529 plan thus far.
Advantages of a 529 Plan.
First, you will get a better tax break than you would with a regular student loan. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out of federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006; your own state may offer some tax breaks as well, such as an upfront deduction for your contributions or income exemption on withdraws in addition to the federal treatment.
Second, you the donor stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who is in charge; you decide when withdraws are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself anytime you desire, no questions asked. However, the earnings portion of the “non-qualified” withdraw will be subject to income tax and an additional 10% penalty tax. Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts.
Third, a 529 plan can provide a very easy hands-off way to save for college as apposed to apply for a student loan. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution, or sign up for automatic deposits then you can relax and forget about it. The ongoing investment of your account is handled by the plan. Plan assets are professionally managed either by the state treasurer’s office or by an outside investment company. You will not even receive a form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. If you want to move your investment around you may change to a different option in a 529 savings program every year, if the program permits, or you may rollover your account to a different states program provided no such rollover for your beneficiary has occurred in the prior 12 months. In addition, there are no federal limits on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.
Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial. In many states, a plan will allow over $300,000 per beneficiary. Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself.