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529 College Plan - What Is A 529 College Plan?

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The cost of a college education rises steadily each and every year. When you look at the prices, it seems like a daunting purchase. Chances are many students will need to take out loans, which could lead to financial problems after graduation. Saving for college is essential, and the earlier you start saving the better off you will be. One such savings plan is called a 529 plan.

A 529 college plan is a plan sponsored by a state or an educational institute that aims to assist families set aside funds toward future college educations. The plan name comes from the IRS code section 529, which developed the savings plan in the late 1990’s. A 529 college plan is a plan that carries many tax benefits as well as other benefits such as scholarship opportunities and creditor protection. Different 529 plans have different rules, but in general you can attend college in a state other than where you reside or where you invest in your plan. However, maximized benefits come from using your 529 plan in the same state.

There are two types of 529 plans. With a prepaid plan, you essentially buy education credits at the current prices that you can use in the future. It is akin to buying a lot of product such as paper towels today so that you have them when the price goes up. The benefit of starting a prepaid plan is directly tied to the tuition rate increases. A prepaid plan can be sponsored by either a state or a college. The other type is a savings plan, which is similar to a 401k. You invest savings that are placed in investments such as mutual funds. As those investments perform, so go the savings in your 529 plan. Similar to a 401k, the investment strategy becomes more secure as the beneficiary approaches college age. Savings plans are only sponsored by the state. The money in a 529 plan can be used for most expenses at an accredited college. These include books, supplies, tuition, or room and board. A 529 plan cannot be used to cover student loans.

A 529 plan carries several benefits. One benefit is that the state usually provides tax a deduction for you for all of your 529 college plan contributions. Another benefit is that your balance grows over the years with taxes deferred, much like a 401k plan. Since 529 contributions are not made pre-tax as 401k contributions are, there are no taxes deducted when the plan funds are withdrawn, provided they are withdrawn for education costs.

Another benefit of a 529 college plan is that they are easy to use. Once you determine what plan you want, the work is pretty much done for you. You can maintain complete control if you want, but in general your investment strategy is left up to the plan administrator. Also, you don’t need to worry about any tax ramifications until the year you withdraw the funds. That means no forms are needed in the preceding years come tax time. In addition, if you have the right to use those funds for yourself if needed. However, doing so means all the funds are taxable and subject to penalties.

With 529 college plans, there are no age or income restrictions. Regardless of how much money you make, you can participate in a plan. You can also contribute large deposits, sometimes up to $300,000. If you want to move your plan to a different state, you can do that as well once a year. That means if you move or if your child is set on leaving the state, you have that flexibility.

One thing to keep in mind with 529 plans is that they are counted as assets. That could have an impact on other financial aid needs for college. The actual impact depends on if the 529 plan is owned by the parents or owned by the student. In general, these are great college savings plans because they are flexible, easy to use, and offer great tax benefits. If you are interested in a 529 college plan, contact an administrator in your state and inquire about the details.

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