What is a 529 Plan?
- State sponsored investment account used for educational purposes
- Contributions are made on behalf of a beneficiary, typically a minor
- There are 2 types of 529 Plans
- 1. 529 Savings Plan
- 2. 529 Prepaid Tuition Plan
- Earnings and qualified withdrawals are tax free
- No income limits for the 529 savings plan and prepaid plan
- High contribution limits, roughly between $200,000-$400,000
- Money grow tax free and can be withdrawn tax free if used for qualified education expenses
529 College Savings Plan
- This plan can be used for any college in the U.S and abroad that is accredited by the Department of Education of the program, as well as k-12 levels, professional schools, technical schools, and trade schools
- This plan invests in a portfolio of securities that typically contains etfs, or mutual funds that are invested in stocks and bonds
- Dynamic allocation options includes aged based portfolios and enrollment date based portfolios
- Allocation options also include static portfolios
- States typically offer direct sold and advisor sold plans
- Money can be used for any qualified education expense, including books, room and board
- You can enroll in a 529 college savings plan in any state
- If you enroll in a savings plan in a state other than your residency, you will still get the federal tax benefits but you will not get the state tax benefits
- Your funds are subject to stock and bond market risk
- Financial Institutions typically charge an annual fee to manage the account
What is a Prepaid College Plan
- This plan allows you to lock in college tuition at todays rates by purchasing units or credits
- Credits and units can be purchased via regular installments or lump sum
- Credits can be transferred to another beneficiary if they do not go to college or get a scholarship
- Beneficiary must attend an in state public school, some private schools may be eligible
- Money can be used for tuition
- Money can not be used for housing or books
- Most states have an in state residents only requirement
- Most states have an age or grade limit in order to get started
- Protects you from inflation against the rising cost of college
- If the beneficiary chooses to go to a school that is ineligible, then only their contributions will be used, gains within the account will no longer be eligible
- These accounts are typically managed by private investment firms or the government
- These plans are not associated with the stock market
- There is an enrollment fee as well as other potential miscellaneous fees such as returned check fees as well as fees for changing your contribution schedule
- Typically, funds must be used by the time the beneficiary turns 30