529 Plans Explained

Posted by Dave Dunn on October 9, 2008 | 0 Comments

Tags: Accounting

529 Plans are educations savings plans which are designed to help families put away money for future college expenses. An explanation of the key benefits of 529 plans follows, along with answers to some common questions about 529 plans.

Benefits of 529 Plans

• While deposits into 529 Plans do not count for federal tax deductions, investments in 529 Plans do grow tax-deferred and distributions which come out to pay for the beneficiary’s college costs (tuition, room & board, books) do come out federally tax free.
• Some states offer tax breaks on money invested in 529 Plans, such as deductions on money invested in the plans up to a certain limit. To learn about the plan in your state, click here.
• The named beneficiary can be changed without penalty, so if one of your children doesn’t go to college, you can transfer the money set aside for them to another child.
• The plans are generally easy to enroll in and contribute to, and they do not require ongoing management.
• There are not generally any income or age restrictions guiding who can put money into 529 Plans and who can benefit from them. If you are thinking about going back to school, set a plan up for yourself.  If you don’t go, make your child or grandchild the beneficiary.

What can the money in 529 Plans be used for?

• 529 Plan money can be used for tuition, books, and/or room & board.
• All accredited colleges and universities qualify.

What if I need the cash or none of my children go to college?

• The donor can withdraw the money from their 529 Plans at any time, though withdrawals are subject to income tax (just the earnings, not the original investment on which you have already paid income taxes) and there is a 10% penalty.

What are contribution limits on 529 Plans?

• Contribution limits on 529 Plans are generally quite high – over $300k per beneficiary in many plans.

Who controls the money I put into a 529 Plan for my child?

• The donor, not the beneficiary, controls the funds. The named beneficiary does not generally have any rights. Therefore, you can make sure the beneficiary uses the funds in a way you approve of (such as using some money each year rather than all the money the first year, for a four-year college only, for tuition only rather than for books and room & board, etc.).