01 Mar Should You or Your Parents Open a 529 College Savings Plan?
You plan to attend college at some point in the next few years and have started exploring your financing options. Besides tuition, you need to factor in the cost of books, room, and board if you plan to live on campus, food, and your other bills such as car insurance and your phone bill. Traditional forms of financial aid may not cover it all.
The 529 College Savings Plan is a way to save for college that families sometimes overlook. They also tend to have misconceptions about it. Accolade Financial describes what the 529 College Savings Plan is, who qualifies for it, and its benefits in this blog post.
History of the 529 College Savings Plan
The idea for a tax-deferred college savings plan goes back to 1986. The original legislation came from Governor James Blanchard of Missouri in response to the rising cost of college tuition being beyond the reach of many students and parents. The basis of the plan was to allow families to deposit lump sums of cash into a special savings account to use for future college expenses.
Although the 529 College Savings Plan originated in Michigan, Wyoming and Florida passed the first versions of it. The program has gone nationwide since that time, receiving major upheavals in 1997, 2001, and 2007. The 529 part of the name refers to the section of the tax code that describes the program in greater detail.
Who is Eligible to Open an Account?
Any American citizen over age 18 who has a valid social security number can open a college savings plan. Account-holders can name a beneficiary or list themselves as the beneficiary. Your parents, grandparents, other family members, or even friends can open a 529 account for the purpose of paying higher education expenses.
The account holder maintains control of the funds in the 529 College Savings Plan and can choose to invest some or all of it. He or she has the right to change the beneficiary at any time. Anyone who wants to help you save for college can also donate money to an existing 529 account that lists you as a beneficiary.
Contribution Limits and Tax Benefits
Single account holders can contribute up to $75,000 and married couples can deposit up to $150,000 without triggering the lifetime gift tax limit. For those who choose to invest part of the savings, an investment advisor can provide direction on establishing an investment portfolio. Any money contributed to a 529 plan is on a pre-tax basis and lowers the donor’s taxable income.
Withdrawing from a 529 Plan
The account holder can request a withdrawal from the plan at any time and for any purpose. However, withdrawals not made for higher education purposes incur a 10 percent penalty. The account holder may also need to pay federal income tax on any amount not used for college funding. This rule comes with limited exceptions such as the beneficiary attending a United States military college.
Should you still have questions about the 529 College Savings Plan or wish to discuss other financial aid options, please schedule an appointment with Accolade Financial today.