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The Basics of a 529 Plan
Give your future scholar a head start

With educational expenses on the rise, you can help your student avoid debt and get a head start with a 529 savings plan. These tax-advantaged savings vehicles allow you to manage the funds you contribute, so they’re an excellent way to fund a beneficiary’s college degree without the risk of an impulsive teen spending the money on something frivolous. However, getting started with a 529 plan can be overwhelming. To make it easier to begin your savings journey, here’s a straightforward guide to help you better understand 529 savings plans.

Education savings plans vs. pre-paid tuition plans

There are two kinds of 529 savings plans: education savings plans and pre-paid tuition plans. An education savings plan can pay for your beneficiary’s educational expenses, as long as these expenses meet certain criteria. Qualified expenses include room, board and mandatory fees, as well as tuition. These plans can also fund expenses for the beneficiary’s private, religious or public elementary or secondary education. Pre-paid tuition plans are more strict — your beneficiary can spend the money on only tuition expenses and mandatory fees. They must also be used at select schools. If the beneficiary isn’t enrolled at a participating school, the plan will pay for a fraction of the original investment. Furthermore, you can’t use it to fund the beneficiary’s elementary or secondary school. Every state in the U.S. sponsors at least one form of 529 plan, so check to see which plans are locally available to you.

Tax benefits

Investing in a 529 plan brings significant tax benefits. Although in most states you won’t be able to deduct your contributions, all of the earnings can grow without state or federal income taxes until they’re withdrawn. Furthermore, all qualified withdrawals are also free from federal taxes. As for state taxes, 33 states and the District of Columbia waive taxes when the plan’s funds are spent on qualified expenses, according to Ken Clark, a certified financial planner and contributor to The Balance.

Rules and restrictions

As previously discussed, different types of 529 plans have rules regarding how their funds can be spent. If you or your beneficiary spends the funds on non-qualifying expenses, then you’ll have to pay federal income taxes on the earnings of the withdrawn amount, as well as a 10% penalty. Luckily, 529 plans keep you in control of the money — your beneficiary has no right to the money, even once they hit legal age, according to SavingForCollege.com. Furthermore, you can transfer the 529 plan to a different beneficiary, if you so choose.

Fees and expenses

While a 529 plan offers tax benefits, they come with certain expenses, as well. Education savings plans and pre-paid tuition plans typically have both initial and ongoing fees. You’ll likely pay an enrollment or application fee, as well as a few recurring expenses, such as an annual maintenance fee and an asset and program management fee. However, according to the U.S. Securities and Exchange Commission, you may be able to receive a fee waiver if you meet certain residency requirements, have a high account balance, set up automatic contributions or opt to receive electronic documents instead of paper copies.

A 529 plan can be an excellent, low-maintenance savings vehicle for educational expenses. If you’d like more information about 529 savings plans, research your state’s guidelines or consult a financial planner.



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