If you've got a little one and are wondering how you are going to pay for college, an 529 Plan might just be the solution. A college education is pretty expensive, and most parents usually have a hard time saving for their kid’s tuition fees. If you are smart, however, you know that the best thing to do is to start saving as early as when your child is born.
One of the most popular savings vehicle today for getting ready for your scholar is a 529 plan. This is named after a section of the IRS code that was responsible for creating it. It is a gold standard that parents can use to save for college. Now, depending on where you live, and the plan you choose to use, you can either have a state tax write-off or not.
A 529 plan is used to save for college. It offers tax and financial benefits for the saver, and the funds can be used to invest in a k-12 tuition in addition to the college costs. Now, in exchange for tax advantages, you are required to follow the rules set out by the 529 plans. These rules are however a little more flexible than what people think.
What are the different types of 529 plans?
529 plans are usually categorized as either college savings or prepaid tuition; College savings works almost the same as the Roth IRA or the 401 (K). You invest your after-tax contribution into similar investments or mutual funds. This plan offers several investments that you can choose from, while the prepaid tuition enables you to pre-pay all or some of the costs when your child starts college.
What Are the 3 Things You Need To Know About A 529 Account?
You can actually change who gets the money from a 529 account
For a long time people believed that you could never change the recipient of the funds from a 529 savings account. That is simply not true. If, for example, you opened the account for your first-born and dutifully saved thousands of dollars for their education, and then they decide they do not want to go to college after all, there is a solution. Or perhaps they happen to get a full scholarship for college (fingers-crossed), you can actually transfer the funds to your second, or third born.
Now, if it happens that you probably do not have a second or third born, the funds will not get lost. You can actually transfer them to another member of the family such as a niece, a nephew, aunt, uncle, etc. You could also use the money on yourself and go back to school.
You can use the 529 plan funds for more than just tuition fees
This is yet another thing you probably did not know about a 529 account. Of course, you are saving the money to cover college tuition, and according to recent reports, the cost of tuition has been going up year after year.
You can use the 529 account to pay for more than just the tuition. This means that you can utilize the funds for other college expenses such as books, boarding, computer charges, etc. if the college requires that. In fact, you can use the funds to pay for both in campus room and board as well as off-campus.
You can change the graduation year of your child in order to suit your investment plan
If you have been investing in a 529 plan, you were probably asked which year your child would be graduating from high school. This information is usually necessary so that the mix of investments can mature in time for your kid’s college education. This is excellent because now when the time is near, the college funds shall not be invested in portfolios that would require longer to mature.
Now, if you do not want the money in cash, you can take advantage of the growth potential so you can have enough time to recover in case of any losses.
What Is Not Covered By The 529 Plan?
The funds in the account are yours, and you can withdraw them when you need them. However, the earnings part of the account is subject to income tax and a 10% penalty. At the college level, the rule usually is that you can use the money for expenses that are required to enroll your child, but there are other costs that are not covered such as transportation and health insurance. The cost covered must be something that the college has termed as a comprehensive tuition fee or a fee that has been identified as a “requirement for attendance or enrollment.”
What You Need To Know About The 529 Plan Conclusion
There has been a lot of misinformation concerning 529 accounts, and most people have actually been afraid of using them to save for their child’s tuition. We've provided you with some need-to-know information that should help alleviate your doubs. You can also use the information here as a jump off poing to consult an advisor. This information and a little research should help you feel more secure in your and your child's educational future.
