What You Need to Know about 529 Plans

June 19, 2012

With high school graduations in full-swing, it’s a good time to take a closer look at an education savings plan that can help you set aside funds for college costs.

Named after Section 529 of the Internal Revenue Code, 529 Plans are operated by state or qualified educational institutions to help families save for college expenses. With most plans, your choice of school is not affected by the state in which you have your 529 Savings Plan. For example, you can be a CA resident and invest in an Arizona plan, and send your student to a college in North Carolina.

Almost every state has at least one 529 Plan available, and it is up to each state to determine whether it will offer a plan (in some cases, more than one) and what it will include. Because 529 Plans vary from state to state, it’s important to research features and benefits of plans before you invest.

Types of 529 Plans
529 plans are categorized into either prepaid or savings plans:

Prepaid Plans let you prepay all or part of
the costs of an in-state public college education. In some cases, they can also be converted for use at private and out-of-state colleges.

Savings Plans are similar to 401Ks and IRAs
as they enable you to invest contributions in mutual funds or similar
investments. These plans typically provide several investment options from which to choose. Your investment will go up or down in value based on the performance of the particular option you choose.

Benefits of 529 Plans
529 plans offer valuable income tax breaks and several other key advantages over other types of college savings options.

Tax Benefits
While 529 Plans are not deductible on your federal tax return, your investment grows tax-deferred as long as it remains in the plan. Distributions to pay for the beneficiary’s college costs are federally tax-free. Many states also offer tax breaks such as an upfront deduction for your contributions or income exemptions on withdrawals.

Simplified Tax Reporting
With a 529 Plan, you do not need to worry about Form 1099s to report taxable or nontaxable earnings until the year you make your withdrawals.

Easy to Manage
Once you’ve done your initial research of plans and determined which one is right for you, you will only need to complete a simple enrollment form and begin making contributions. To make it even easier, you can take advantage of automatic deposit, and forget about it if you like. The ongoing investment will be handled by the plan.

Control of Your Funds
As the donor, you will remain in control of the account. The named beneficiary does not have rights to the funds, and only you can decide when withdrawals are made and for what purpose. In most cases, you can even reclaim your funds at any time, no questions asked. However, it’s important to remember that the earnings portion of the non-qualified withdrawal will be subject to income tax and an additional
10% penalty tax.

Flexibility
You will have the ability to move around your investment as you like each year. You can rollover your account to a different state’s program, and there is no federal limit on the frequency of these changes. It’s important to note that every 529 Plan has different rules that may or may not affect the number of changes you can make.

Large Deposits Allowed
The amounts that you can deposit in a 529 Plan can be substantial. In some states, the limit is as high as $300,000. There are also no income limitations or age restrictions. So, if you’re thinking about returning to college or graduate school, you will definitely want to consider a plan for yourself!

Want to learn more about 529 Plans and how they can make your family’s educational goals come true? Contact Wallace & Associates today.