An Introduction to 529 Plans

An Introduction to 529 Plans

What is a 529 plan?

Originally designed to promote saving for upcoming college costs, 529 plans have tax-advantages, and are sponsored by states, state agencies, or educational institutions. These plans are sanctioned by Section 529 of the Internal Revenue Code, according to Smart Saving for College, from the Financial Industry Regulatory Authority.

Income size is usually not a factor nor a limit in a 529 plan. Contributions of any size can be made into the 529 plan, and anyone can make a contribution into the plan on behalf of the beneficiary. An aunt or an uncle, or even a neighbor, can contribute directly into the plan. Parents or grandparents can even establish a 529 plan for their future college student. By doing so, their taxable property will decrease and they still retain control of expenses. Anyone who wants to save for college, either for themselves or for a relative, should study 529 plans in their state.

There are two main types of 529 plans: pre-paid tuition and college savings. With the college savings plan, students are allowed to attend any school of their choice, in state or out. The 529 plan will help cover all normal educational costs. The pre-paid plan is discussed in more detail below.

When selecting a 529 plan, consider three main features: contributions, eligibility, and distributions. Contributions can be made for large sums; they can also be gifts. This is especially nice if grandma and grandpa want to give a donation towards their grandchild’s college fund as opposed to buying another electronic game or gadget for his/her birthday. And anyone who plans to attend a post-secondary educational institution can have a 529 plan (eligibility). Money needed for specific educational expenses (tuition, fees, books, supplies, etc.) can be withdrawn without federal penalty. However, if a student takes money out for fees, or items other than “qualified expenditures”, he/she will be responsible for federal and state taxes (distributions).

Another type of a 529 plan that we have not mentioned is a pre-paid tuition plans. These types of plans usually allow those planning to attend in-state schools the ability to purchase “credits” at participating colleges and universities. These credits will then be used for future tuition and, in some cases, room and board; the importance of this type of plan was huge when it first came out. Parents were thrilled to think they could lock in their child’s tuition rate 15 to 18 years ahead of time! Because of the state educational institutions that this would involve, however, this type of plan usually has residency requirements; it would also be sponsored by the state government. The one drawback I discovered is that most plans have a restricted enrollment period. This type of 529 plan would also look at the beneficiary’s age and/or grade, thus placing an enormous limit on the 529 plan. Be sure to read the fine print or have a financial adviser explain the plan in detail to you.

To find more information regarding your state’s 529 plans, be sure to visit the following links:

  • College Savings Plan Network
  • SEC’s EDGAR database
  • Investment Adviser Public Disclosure website
  • FINRA’s BrokerCheck Website
  • Broker-Dealer Public Disclosure Website