Do You Know About The 529 Savings Plan?
What is the 529 Savings Plan?
Basically, it's a tax advantaged investment that helps and encourages saving for the expenses of higher education for a specific beneficiary, usually a dependent or a grandchild. It's named after Section 529 of the Internal Revenue code. The 529 savings plan is administered by state agencies and organizations.
The biggest benefit, is that all withdrawals from a 529 Savings plan are tax free from federal tax! In addition, many states and local governments also match the federal tax advantages and offer state tax deferred growth and tax free plan withdrawals for certain college expenses.
Anybody can open a plan and even if you yourself are planning on going back to school at any given time, you're allowed to open a 529 savings plan. It doesn't just have to be for your children or grandchildren. That being said, there are certain enrollment limitations, and some plans have contribution limits.
Take NOTE: A 529 College Savings Plan, where mutual funds and securities are part of the plan, is NOT guaranteed by state governments, nor are they federally insured.
How Does a 529 Plan Differ By State?
Each state that offers a 529 plan determines how its plan is structured and which investment options are offered. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as a state tax deduction, a matching grant, and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans offered by their state of residence.
Types of 529 Savings Plan
There are two types of plans: savings and prepaid tuition plans. Prepaid 529 plans may be administered by states or higher education institutions. Prepaid tuition plans, also called guaranteed savings plans, are currently available in 12 states and allow for the pre purchase of tuition based on today's rates and then paid out at the future cost when the beneficiary is in college. The benefit of this is, you're getting rates today, avoiding higher costs later, and still getting the tax break.
Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds. 49 states and Washington, D.C. offer a savings plan. Most 529 savings plans offer a variety of age-based investment options where the underlying investments become more conservative as the beneficiary gets closer to college. Similar to a retirement plan. Once you begin approaching your target age, your investments move from ones of some risk to a more stable investment strategy, such as government backed bonds, etc. However, if you choose, you may participate in a risk based investment, in which the investment options don't change and remain in the original fund or combination of investments regardless of the beneficiary's age. In addition, many savings plans offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in CDs. For even more in depth information, here is a good outline from the US Securities and Exchange Commission.
Should I invest in a 529 Savings Plan?
Each individual should consider their overall financial situation, and also decide if higher education is going to definitely be in their future. It's important to know that if you DO NOT use your 529 account for higher education and use it for something else, you may face penalties or lose benefits. If you DO decide college is right for you, then deciding how to save is your next step. The 529 plan is only one way to save for college. It provides considerable tax advantages, but may also come with a certain amount of risk, whereas a standard bank CD or savings account, while maybe not giving you the potential gains in your money or tax breaks, will remain a stable investment and form of saving.
As always, feel free to sign up for our Free Financial Aid Guide and help obtaining scholarships, college grants, student loans, & more.
Basically, it's a tax advantaged investment that helps and encourages saving for the expenses of higher education for a specific beneficiary, usually a dependent or a grandchild. It's named after Section 529 of the Internal Revenue code. The 529 savings plan is administered by state agencies and organizations.
The biggest benefit, is that all withdrawals from a 529 Savings plan are tax free from federal tax! In addition, many states and local governments also match the federal tax advantages and offer state tax deferred growth and tax free plan withdrawals for certain college expenses.
Anybody can open a plan and even if you yourself are planning on going back to school at any given time, you're allowed to open a 529 savings plan. It doesn't just have to be for your children or grandchildren. That being said, there are certain enrollment limitations, and some plans have contribution limits.
Take NOTE: A 529 College Savings Plan, where mutual funds and securities are part of the plan, is NOT guaranteed by state governments, nor are they federally insured.
How Does a 529 Plan Differ By State?
Each state that offers a 529 plan determines how its plan is structured and which investment options are offered. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as a state tax deduction, a matching grant, and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans offered by their state of residence.
Types of 529 Savings Plan
There are two types of plans: savings and prepaid tuition plans. Prepaid 529 plans may be administered by states or higher education institutions. Prepaid tuition plans, also called guaranteed savings plans, are currently available in 12 states and allow for the pre purchase of tuition based on today's rates and then paid out at the future cost when the beneficiary is in college. The benefit of this is, you're getting rates today, avoiding higher costs later, and still getting the tax break.
Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds. 49 states and Washington, D.C. offer a savings plan. Most 529 savings plans offer a variety of age-based investment options where the underlying investments become more conservative as the beneficiary gets closer to college. Similar to a retirement plan. Once you begin approaching your target age, your investments move from ones of some risk to a more stable investment strategy, such as government backed bonds, etc. However, if you choose, you may participate in a risk based investment, in which the investment options don't change and remain in the original fund or combination of investments regardless of the beneficiary's age. In addition, many savings plans offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in CDs. For even more in depth information, here is a good outline from the US Securities and Exchange Commission.
Should I invest in a 529 Savings Plan?
Each individual should consider their overall financial situation, and also decide if higher education is going to definitely be in their future. It's important to know that if you DO NOT use your 529 account for higher education and use it for something else, you may face penalties or lose benefits. If you DO decide college is right for you, then deciding how to save is your next step. The 529 plan is only one way to save for college. It provides considerable tax advantages, but may also come with a certain amount of risk, whereas a standard bank CD or savings account, while maybe not giving you the potential gains in your money or tax breaks, will remain a stable investment and form of saving.
As always, feel free to sign up for our Free Financial Aid Guide and help obtaining scholarships, college grants, student loans, & more.