The Basics of 529 College Savings Plans
By Jennifer Quillen
It’s never too early to start planning for your baby’s future. So what can you do now to save money for your child’s education? Consider a 529 College Savings Plan.
What is it?
A college savings plan is a qualified tuition program established under Section 529 of the Internal Revenue Code. Basically, a college savings plan lets you save money for a child’s college education in an individual investment account. Although the details of college savings plans vary, the basics are the same. A parent, a grandparent, or anyone else can open an account and name someone as beneficiary.
Why a 529 Plan?
Contributions grow tax deferred
Income taxes on money the account earns are deferred until the time you make a withdrawal.
Withdrawals used for the beneficiary’s qualified education expenses are income tax free at the federal level
Qualified education expenses include unreimbursed college and graduate school expenses for tuition, fees, books, supplies, required equipment, and computers, software, and internet access while the beneficiary is in college. Room-and-board expenses are also considered qualified if the beneficiary attends school at least half-time.
Funds can be used at virtually any college
The money in your plan can be used for any college in the country and abroad that is accredited by the U.S. Department of Education. This includes undergraduate colleges, graduate and professional schools, two-year colleges, technical and trade schools, and foreign colleges.
Participation is not restricted by income level
College savings plans are open to all individuals, regardless of income level.
How to get started?
Select a plan
Before choosing a 529 plan, research the plan with the best money manager, investment options, flexibility, historical performance, customer service, and fees. Most college savings plans can be researched online.
Complete an application and designate a beneficiary
The beneficiary is the person who will receive the plan proceeds. You can generally name anyone as the beneficiary – your child, your grandchild, niece, nephew, or other relative or friend. Some plans even allow you to name yourself.
Choose an investment portfolio
Most college savings plans offer several investment portfolio options. Other plans will pick one for you based on your child’s age. Choose a fund based on your beneficiary’s age, your risk tolerance, and your overall financial plan. Keep in mind that all investing involves risk, and there can be no assurance that any investment strategy will be successful.
Make a cash contribution to open the account
Most plans require you to make an initial contribution when you open an account. Federal rules require all contributions to a college savings plan to be made in cash (or cash alternatives like checks). After your account is open, you can make additional contributions as often as you wish. Each plan limits an account’s total value. When the plan’s total account limit is reached, no more contributions will be accepted for that beneficiary. Keep in mind that some plans may require a minimum amount per contribution or restrict the total contributions allowed in one year.
Jennifer Quillen is a Financial Advisor with Money Concepts Wealth Management and Financial Planning partnering with Legacy Consulting Group, a tax and financial planning firm in Lexington. Jennifer has been working in the financial industry since 2002, and she assists clients in the areas of retirement planning, asset protection, risk management, education funding, and small business consulting, among others. One area in which Jennifer focuses is in helping clients, particularly small business owners save money on their taxes.