Today 529 plan is one of the most popular options for paying school expenses when your child reaches college age. And saving early for education is one of the best decisions parents can make. Still, the last analytic show that many Americans are unfamiliar with the details of how to open, fund and receive tax benefits from such plans.
Before you made a decision, it is important to search for plan details, compare your state plan to out-of-state-options and research plan investments. If you’re new to 529 plans, read this guide about 529 plan questions and answer.
Q. What is a 529 plan?
A 529 plan is a tax-advantaged savings plan. This plan is designed to encourage saving for future college costs. Sponsored by states, state agencies, or educational institutions 529 plans, legally known as “qualified tuition plans,” are authorized by Section 529 of the Internal Revenue Code.
What are the main advantages of 529 plans?
- 529 plans offer unsurpassed income tax breaks. Funds in a 529 plan grow federal tax-free and will not be taxed when you take money to pay for college.
- Check and research because your own state may offer tax breaks as well. Today, over 30 states offer a full or partial tax deduction or credit for 529 plan contributions.
- The donor stays in control of the account. The named beneficiary, with few exceptions, has no legal rights to the funds so you can assure the money will be used for its intended purpose.
- As an owner of 529 account, you can withdraw funds at any time for any reason. But if you withdrawals money for the non-educational thing you can expect income tax and an additional 10% penalty tax.
- A 529 plan is an easy way to save for college. Everything that you need to enroll in that simple visit the plan’s website or contact your financial advisor.
- Contributions do not have to be reported on your federal tax return. Because of this, you will receive form 1099 to report taxable or non-taxable earnings in the year you make withdrawals.
- If you are not satisfied with your 529 plan, don’t worry, you have an opportunity to change your 529 plan investment options twice per the calendar year. Also, you can rollover your funds into another 529 plan one time in a 12-month period.
- Everyone is eligible to take advantage of a 529 plan.
- 529 plans have no income limits, age limits or annual contribution limits.
Can anyone set up a 529 plan?
Yes. Everyone is eligible to take advantage of a 529 plan. When you (or somebody else) set up the plan, then you can name anyone as a beneficiary. You as the contributor or the beneficiary will not have any income restrictions. There is also no limit to the number of plans you set up.
Are there different types of 529 plans?
There are two basic types of 529 plans: prepaid tuition plans and college savings investment plans. States are permitted to offer both types. And each state has its own plan and each plan is somewhat unique. Prepaid tuition type 529 plan can offer only a qualified education institution.
Am I restricted to my own state’s 529 plan?
No. Maybe your state’s 529 plan doesn’t offer what you need. So you may find another plan you like more. You need to check all the advantages and disadvantages of the plans you are offering and find the one that best suits your needs.
Who controls the funds in a 529 plan?
Custodian is a person who purchases the 529 plan. That person also controls the funds until they are withdrawn.
Each 529 plan account has one designated beneficiary. What does that mean?
A designated beneficiary is a person for whom the plan is intended to provide benefits (usually the student or future student). Generally, the beneficiary is not limited to attending schools in the state that sponsors their 529 plan. But in order to avoid mistakes, check the rules of your chosen plan before setting up an account.
Can I change the beneficiary of a 529 plan?
Yes. If you change the designated beneficiary to another member of the family, there are no tax consequences. Also, any funds transferred to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family are not
What is an eligible educational institution?
An eligible institution is generally any educational institution like college, university, vocational school, or other postsecondary educational institution. All of them are eligible to participate in a student aid program administered by the U.S. Department of Education.
Is setting up a 529 plan for my child right for me?
Only you can answer this question and definitely 529 plans are not for everyone.
What Unique Policies Apply to My State’s 529 Plan?
College 529 policies vary from state to state, they usually follow the same basic guidelines. And definitely, state tax deductions are the best incentive for residents to use one of their state’s 529 plans.
State that has income taxes but doesn’t offer an income tax deduction or credit for 529 contributions: California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota and North Carolina
State that doesn’t have an income tax, so no deduction would be applicable: Alaska, Florida, New Hampshire, Nevada, South Dakota, Texas, Tennessee, Washington and Wyoming
State that offers their residents tax deductions for contributions to any 529 plan: Montana, Arizona, Kansas, Missouri, and Pennsylvania
How (and Where) Can 529 Funds Be Spent?
For 529 plans, eligible institutions are every accredited college and graduate schools. Contributions are intended for various qualified education costs. This includes tuition, books and room and board for those attending at least halftime.
Approved transactions are very slightly from plan to plan and often referred to as qualified withdrawals. Every unauthorized purchase can cause monetary penalties and the tax deductions will be recaptured.
Usually, every state offers multiple plans from which to choose, and dozens of state plans are sold nationally, regardless of where the account owner lives. One of the biggest advantages of this plan is that you are not limited to your state’s offerings, particularly if you live in a state with no income tax. So it is important to collect all the necessary information before you choose the plan.
Q. Where can I find more information about 529 plans?
A good source is IRS Publication 970, Tax Benefits for Education.
What can you use a 529 for?
The 529 plan is intended to cover the costs of higher education. In general, qualified higher education expenses are the costs required to attend a college, university or other eligible post-secondary educational institution. So you can use tax-free 529 funds to pay these expenses.
As a result of the 2017 Tax Cuts and Jobs Act from January 1, 2018, the definition of qualified higher education expenses (for tax purposes) is expanded to include tuition for K-12 schools. The new withdrawals law limits for eligible K-12 tuition to $10,000 per beneficiary per year.
Can anyone contribute to a 529 plan?
Yes, anyone can establish and contribute to a 529 plan on behalf of a beneficiary.
Your relatives, family, friends or even beneficiary can establish a 529 plan
Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. When you contribute to a 529 plan you must be aware that there may be gift tax consequences if your contributions, to a particular beneficiary, exceed $14,000 during the year.
What do I need to know to make a contribution to a 529 plan?
You need to know the account number and indicate that number on your check in order to make contributions to a 529 plan account owned by someone else.
You can use contribution form for most 529 plans. Also, you can download it from the 529 plan website. Then you can print it for you or you can send them to someone who will make a contribution to your or your child account.
Also, to make sure are following the appropriate procedures in making your contribution you can call the plan’s toll-free number.
What about third-party contributions?
Grandparents, relatives and your friend are free to contribute to your 529 plan. Still, 529 plans may not accept third-party contributions (but we are talking about a very small number). In this case, if grandparents want to give their contribution to the 529 plan, the solution is to give money to the parents of their grandchild who will make the payment.
How much can a grandparent give to a 529 plan?
If contributions over then $14,000 ou may elect on a gift-tax form to treat up to $65,000 of the contribution as made over a five-year period. With this option, you can frontload more contributions into a 529 plan without exceeding the $14,000 annual gift exclusion.
What schools are eligible for 529 plans?
529 plan can be used for almost any college or university in the United States. Also, some international schools are qualified for the 529 plan.
As long as the institution meets the qualifying criteria, students can choose to attend a public or private college or university in any state regardless of the state in which the account was opened.
Should I just invest in my own state’s plan, if my state offers a tax deduction?
You, as an investor, should determine whether their own state’s plan offers good tax benefits, such as a state income tax deduction. If you satisfied, you should consider investing in that plan. But before you make a decision you should check also a performance of the plan, a plan’s investment manager or if there any fees that could offset the tax benefits.
What to check before I choose 529 plan
- In-state tax benefits – such as state tax deductions
- Investment options –You can choose between various investment options offered by most 529 plans. This including Age-Based Portfolios, which invest savings based on a beneficiary’s age and the number of years until he or she will be starting college. Some plan managers offer portfolios that consist solely of funds they manage themselves, while others offer access to portfolios managed by multiple fund companies
- Fees and expenses – check and compare management fees and management fees on underlying portfolios
- Plan performance – when available, review 1-, 3-, 5-, and 10-year performance figures
- Investment management –You should check what financial services that company offer.
If I have more than one child, should I have more than one account?
You will have to separate plans for each of your children. Each 529 plan account can have only one beneficiary. And this is a good rule. It allows you to take advantage of Age-Based Portfolio Strategy which manages the account based on the age of the child.