529 College Savings Plans: A Comprehensive Guide for Parents

Whether your child is a few weeks old or in high school, it’s not too early to think about how to help them with their college tuition. It can seem overwhelming to think of your choices – at the very least, consider a 529 college savings plan.

 

This type of account is made to help you pay for qualified education costs. There are plenty of advantages, but it’s not the right fit for all families.

What Is A 529 Plan?

A 529 plan is a tax-advantaged savings plan that’s used to help pay for qualified higher education expenses, and even covers qualified K-12 education as well. In the eyes of the IRS, these savings plans also referred to as “Section 529 plans” or “Qualified Tuition Plans.” Think of them like a college savings account with a few more perks, rather than just letting the money sit in a regular savings account.

 

A 529 plan exists to encourage family members to save for a child’s future education cost. They’re typically sponsored by educational institutions, states or state agencies. All states plus D.C. sponsor a minimum of one kind of 529 plan.

 

The two major kinds of 529 plans are prepaid tuition plans and savings plans. Prepaid tuition plans let the account holder to pay in advance for tuition and fees at specified schools for the beneficiary, while savings plans are similar to what you have in a retirement account like an IRA.

How Does A 529 Plan Work?

All 529 college savings plans need to have an account holder and a beneficiary. As long as the account holder is at least 18 years old and is a legal U.S. resident, he or she can open an account.

 

The account holder – sometimes referred to as the participant – has control of the account such as the distribution of assets and other investment-related decisions. Other adults can gift money to an existing account.

 

Other rules differ depending on the type of plan that’s opened.

Prepaid Tuition Plans

This type of account lets the account holder buy credits or units at participating universities and colleges for any future tuition and mandatory fees at current prices. For example, if one unit is locked in at $500, you’ll only need to pay that amount, even if it goes up to $600 by the time your child is college-bound.

In most cases, you can’t use prepaid tuition plans to pay for expenses such as room and board. Currently, you’re not able to prepay for elementary and secondary schools.

 

Prepaid tuition plans can appear more restrictive since they might have residency requirements for the account holder and the beneficiary. They’re sponsored by state governments and aren’t guaranteed by the federal government.

 

The money you put into a prepaid tuition plan isn’t guaranteed – you could lose some or all your cash if the educational institution has financial issues. Plus, if your beneficiary doesn’t attend that college or university, you may not get all your money back.

Education Savings Plans

This type of account allows the account holder to open an investment account that’s geared toward the beneficiary's qualified education expenses (this can include room and board). Money you put in can typically be used toward most U.S. educational institutions, including some non-U.S. colleges and universities.

 

The account holder can choose from a wide range of investment options, though it depends on your plan. Keep in mind any money you invest isn’t guaranteed –consult a financial professional just in case.

What Are The Benefits Of A 529 Plan?

Here are some main benefits of 529 plans:

• Tax advantages – Not every 529 plan offers tax-deductible contributions, but the earnings can grow tax free. Plus, if you take money out for qualified expenses, you won’t pay taxes, either. Check to see if there are any limits as to how much you can withdraw each year.
• State tax advantages – Some states also offer full or partial tax deductions or credits if you contribute to a 529 plan.
• You control the account – Your named beneficiary can’t access the funds, which means you can ensure that the money will be used toward qualified education expenses.

Are 529 Plans Worth It?

It’s up to you to decide whether opening a 529 plan will help the beneficiary. You’ll want to consider whether you have the means to set aside money in the first place. For example, if you’re struggling to pay off debt or haven’t put money into a retirement savings account, then that might be something worth doing first.

 

Of course, if you want to make sure you have enough money to help your child out instead of relying on expensive loans, it’s worth it to start now, even if you can’t contribute a ton initially. Whatever you do, make sure to do thorough research to see what the plan offers, whether there are any restrictions and what the penalties are if you don't use the money for its intended purpose. That means comparing different 529 plans to make sure you find the right fit.