A 529 plan is a way for people to save money for a specific individual to attend an institution of higher education. These plans (and there are many) allow for a tax deferment on all earnings and distributions, provided the distributions are used to pay for qualified expenses. Financial planners consider 529 plans to be the best way for most people to accumulate funds for college expenses.
A 529 plan is similar to an education savings account. But the maximum allowable contributions for a 529 plan are much higher. Here's a look at the types of 529 plans and how they work.
1State Sponsored Educational Plan
Prepaid tuition programs allow the purchase of credits at a specific school. This will lock in today's prices. If you know the individual wants to attend a specific college, there may be a state-sponsored plan.
This plan will allow you to lock in and pay the current tuition rate. Most prepaid tuition plans are sponsored by state governments. Moreover, they have residency requirements for the saver and beneficiary.
2Conventional College Savings Plan
The more conventional college savings plan allows contributions to be made for a specific student. This plan can be started at any time, even the day of the birth of the future college attendee. This type offers much greater flexibility since the monies can be applied to any qualifying school.
However, if the future college student is positive about their target school, the pre-paid tuition program is usually a better deal. Not everyone is eligible for a 529 plan, but the great majority qualifies. The eligibility rules are very relaxed.
3Plan Eligibility And Limitations
Essentially, anyone can contribute to a 529 plan for someone else. You can even start one for yourself. The plans themselves can have specific eligibility requirements, for instance, state residence.
They do not have restrictions on income. Although there are no income restrictions, there can be age restrictions on the beneficiaries with some plans. The investment options can also be limited in some cases, depending on the age of the recipient.
4The Qualified Beneficiaries
The beneficiary can be changed to a qualifying family member. There is a long list of eligible family members who can become the beneficiary. For example, if grandparents set up a 529 plan for each of their grandchildren and if one decides not to go to college, they can change the beneficiary to another grandchild or perhaps a niece or nephew.
Anyone who assumes that they cannot contribute to a plan or be a beneficiary is probably mistaken. Check it out. Do this before you dismiss the possibility of taking advantage of these great plans.
5Rules That Apply
The contribution limits vary from state to state. Limits are usually lifetime limits and can be as much as $200,000, but they can differ. While there is no annual limit, anything above $13,000 will incur a gift tax. In some states, contributions are tax-deductible - this will vary with the state and plan. Check out the rules and regulations for your particular state.
In most cases, the investment options are limited to mutual funds and annuities. The options can be based on the age of the beneficiary. More aggressive options are available for younger beneficiaries.
Right now, 529 plans are the best vehicle to accumulate money for higher education expenses. The eligibility and contribution rules are generous. All educational expenses practically qualify for tax-free distributions.
There are many plans with different rules and eligibility requirements. It's a good idea to educate yourself about the details in your state. Select the best plan for your particular situation.