A 529 plan is a way to develop savings to pay for education savings in a tax advantaged way. These plans are typically used for college savings but can also be used for Kindergarten through twelfth grade private school education. 529 plans offer you the ability to have all contributions made be taxed deferred. Money can be withdrawn tax free if it is used for qualified education expenses. These types of expenses include tuition and fees, room and board, and necessary materials such as books. Withdraws can also be used for technical and vocational school tuition, fees, and materials. Keep reading to learn more about 529 plans and how to use them to your advantage.
How do they work?
With a 529 account, a person, most likely a parent, can set it up to allow a specific beneficiary to utilize the funds to pay for qualified education expenses. The account holder will deposit after-tax money into the account. The funds can grow tax-deferred and withdrawn tax-free for the qualified expenses. While parents are the typical account holders, grandparents and other relatives can be account holders as well. Another option is to open on for yourself and fund your own expenses this way, especially if you are planning to go back to school.
What if my child chooses to not pursue higher education?
If your child chooses to not go to college or a vocational school, the beneficiary on the account can be changed to another family member who utilizes the funds for education expenses. If the money cannot be used, it will have to be withdrawn at a certain point. Unfortunately, you will have to pay taxes on the earning and a 10% penalty.
How can I best use my withdrawal?
Only withdraw from your 529 account in the calendar year that you plan to pay for the qualified education expenses. If you do not, this could be categorized as an unqualified withdrawal since you will not be using the funds. To be sure you are in the clear, keep receipts of your expenses that you used the money from the 529 plan on.
Are there contribution limits?
According to the IRS, contributions are not allowed to exceed the amount that is necessary to pay for the qualified education expenses of the beneficiary. Certain states do have imposed limits running from $350,000 to $500,000. It’s best to check with your financial advisor on the contribution limit applicable to you.
529 plans are a great option for families who want to save for their children’s college expenses and receive tax advantages. Most plans have investment options based on age so the investment will be more risk averse as the beneficiary reaches college age. With college expenses rising every year, start saving for your children as soon as you can.