Student Loans

Saving for College: What is a 529 Plan?

The cost of college constantly rises, and if you have a child, you may wonder how you’ll afford to pay his college tuition. There are several ways to approach this. Some parent’s don’t set aside funds and rely on private and federal loans to cover college expenses. Loans can make college a reality, but then there’s the financial burden of repaying student debt.

Opening a college fund may seem like the logical solution. But even if you start early and diligently deposit money into your savings account, you may doubt your ability to save enough to cover all of your kid’s educational expenses. This is an understandable concern, especially since the average earnings on a regular savings account is pennies.

Rather than doubt your ability to save, talk to a financial planner and learn how to reach your savings goal with a 529 plan.

1. What is a 529 plan?

What is a 529 plan? Simply put, this is a unique, yet popular way to save for your child’s future educational costs. These plans are offered by individual states, and by enrolling in a plan, you can set funds aside to pay your kid’s tuition, room and board, books and other college-related expenses. This is an investment plan, and you can choose to invest your contributions in mutual funds, bonds, stocks and money market accounts. You don’t pay federal income taxes as your money grows, nor do you pay federal taxes on withdrawals – as long as funds are used for higher education.

Just about every state has a plan, but you don’t have to invest in your state’s plan. Your child can use funds to attend school in any state. There are tax advantages to choosing a plan offered by your state. However, another state’s plan may have features that best match your financial goals.

2. Who can open a 529 plan?

529 savings plans aren’t only for parents. Anyone can open an account, including friends, grandparents and other relatives. If you don’t have an account, you can always contribute to a 529 plan created by the child’s parents.

3. What are the contribution limits?

Unfortunately, there are limits to how much can be contributed to a 529 plan. This limit varies by state, however, most states allow contributions greater than $200,000. There are also limits to how much you can contribute within a certain span of time. You can contribute up to $65,000 in a five-year period, or $130,000 if you’re married.

4. What if a child doesn’t attend school?

Realistically speaking, your child may decide not to attend college. There are two ways to handle this situation. You can choose a different beneficiary for the account, perhaps another biological child, a stepchild, a niece or a nephew. Or you can withdraw funds from the account and use the money for another purpose. In this case, earnings are subject to both federal and state taxes, plus you will pay a 10% penalty.

5. How to get started?

Setting up a 529 savings plan is as simple as setting up a bank or other investment account. To enroll, you will need to work with a broker or a financial advisor. This professional will help you select the best program, as well as the best investment option for your contributions. If you prefer to enroll in a plan offered directly by the state, you can set up an account through a direct sold college saving program.