529 Fund – Three Reasons to Set One Up

The popular 529 college savings plan gets its name from Section 529 of the Internal Revenue Tax Code. It was designed to encourage saving for future college costs. You have probably heard and read about the many benefits of a 529 plan including its tax-deferred earnings and the tax-free distributions. There are several other important reasons to set up a 529 college savings plan, let’s take a look at three.

Minimum Investment Amount

It is a myth that you need a hefty sum of money to open a 529 account or that you need to regularly make large contributions to it. Individuals from all income brackets can benefit from a 529. Many plans can be opened with as little as $ 25 and most don’t require a minimum monthly contribution unless you are automatically deducting the amount from your paycheck; which even then is a minimal amount. For example, Georgia’s plan only requires that you contribute $ 15 per automatic payroll deduction.

If you need to stop contributions at any time, that’s okay too. Your account will remain in good standing and the balance will continue to gain interest. When you are ready, you can begin contributing once again with no penalties or fees.

No Enrollment Period

A major benefit of 529 plans is the absence of a defined enrollment period. Whenever you decide you want to go ahead with a 529 plan, you can do so immediately. This flexibility is invaluable as even a couple of months can make a difference with regards to potential earnings. If you want to change your investment options; some plans only allow changes a defined number of times a year. If you will be taking a conservative approach, this will not be a concern. If you will be investing in high-risk, volatile funds, you may want to consider a plan that lets you make changes more often. The good news is that because you are not limited to the plan sponsored by the state in which you live; you’ll be certain to find a plan that matches your personal investment strategy.

Easy to Withdraw Money for Non-College Expenses

If you need to withdraw the funds early from your 529 savings plans, you can do so with minimal penalties or taxes. Upon withdrawal for non-college expenses, you will be imposed a 10% penalty by the federal government on your earnings (profit) only. You will not be required to pay a penalty on your original contribution. For example, if you’ve contributed a total of $ 5,000 and have made $ 600 in interest during that time, your penalty will only be 10% of $ 600.

Along the same lines, you will pay regular income tax on these earnings only and not your original contribution. In our example, you will only owe taxes on the $ 600. This flexibility makes 529 savings plans ideal even if the idea of putting money away seems unrealistic right now. If you end up needing your money back, it’s yours.

Saving for college truly is easy with a 529 plan. You can have an account set up in no time with a very small amount down and just a few dollars every month. Our website, the 529 savings plan guide, can get you started.

Elizabeth Dennis writes for a variety of education topics, including saving for college, paying for college, and campus living.

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