Opening a 529 Plan

Opening a 529 Plan is a good first step when planning on how to pay for college expenses. Many times parents or grandparents fund a 529 Plan for the benefit of their children or grandchildren to fund their higher education. It’s a great way to save money away for college. Often we’re asked about 529 Plans so here are some of the basics.

What is a 529 Plan

A 529 Plan is a savings account with tax advantages specifically designed to help families save for future education expenses. Sponsored by individual entities in all fifty states and the District of Columbia, 529 Plans come in two different forms—a prepaid tuition plan and an education savings plan.

Prepaid Tuition Plan

Prepaid tuition plans are generally offered by public and in-state colleges and allow a 529 Plan user to buy units at participating institutions to be used for future tuition and fees at current rates. Room and board cannot be funded through a prepaid tuition plan nor can costs for elementary and secondary schools. The federal government does not guarantee prepaid tuition plans, however state governments who sponsor the plans might. If your plan is not guaranteed, some of the funding may be lost if there is a financial shortfall by the plan’s sponsor. Additionally, if the beneficiary of the plan does not attend a participating college, the prepaid tuition plan may pay less in the long-term.

Education Savings Plan

An education savings plan lets the plan owner pen an investment account to save for the beneficiary’s future higher education expenses. In this case, tuition, room and board, and fees are all included as qualified expenses. Plan withdrawals can be used at any college or university. And education savings plans can fund up to $100,000 per year at a public or private elementary or secondary school. Investment options include a range of mutual funds, ETFs, and bank products. Some education savings plans offer “target-date” portfolios which automatically adjust as the beneficiary gets closer to college age. Individual states sponsor education savings plans, but only a few have residency requirements.

Tax Benefits

Many states offer tax benefits for 529 Plan contributions. These include contribution deductions from state income tax or matching grants. Additionally, earnings in a 529 Plan grow tax-free over a period of time. The earlier you open the plan, the longer your investments will grow tax-free.

Effects on Financial Aid

A 529 Plan impacts a student’s eligibility to receive need-based aid. There’s no one-sized-fits-all formula and each institution treats a 529 differently. Many families take out loans to cover the costs of college. The more a family saves in a 529 Plan, the less debt they occur along the way.

Opening a 529 Plan is a good choice for many families. Schedule an appoint with Accolade Financial today to learn more.