Happy National ‘529 College Savings Plan’ Day!
To those who already know what a 529 Plan is: I salute you.
To those who have no idea what I’m talking about: you have come to the right place.
Below is a basic overview of 529 plans and the important role they play in college planning.
What is a 529 Plan?
A 529 college savings plan is a qualified tuition program established under Section 529 of the Internal Revenue Code. (Have I lost you already?)
Simply put, a 529 plan is an opportunity for parents to save money for college in an investment account featuring tax-deferred growth (aka. no federal income tax on interest earnings) and tax-free withdrawals.
They are available to every single family, regardless of annual household income. There are a variety of 529 plans out there, and the rules (and tax benefits) for each plan vary by state.
*** UPDATE: 529 plans aren’t just for college anymore! Thanks to the new tax reform law (the ‘Tax Cuts and Jobs Act’ of 2017), parents can now use 529 savings plans to pay tuition at elementary and secondary public, private, or religious schools. In the words of our President, this is “YUUUGE.” If you are planning to use a 529 plan for early education, you should consult your financial advisor to revise your long-term educational funding strategy.
How Can I Spend 529 Plan Money?
529 plan withdrawals stay tax-free if the money is used on “qualified education expenses.” This usually includes tuition, fees, books, computers, and internet. It sometimes includes room and board, but you will need to verify that with your specific plan.
What Colleges Take 529 Plan Money?
529 account funds can be used at any college accredited by the U.S. Department of Education. This covers undergrad, graduate school, trade schools, and even some foreign colleges.
Who Can Open a 529 Plan?
Anyone with a Social Security number and a permanent address can open a 529 plan and name a beneficiary (aka. the future college student). Once the plan is open, anybody can contribute.
Who Controls the Money?
There are 2 main roles in a 529 account:
1) Account Owner: the person who opened the account. They decide when withdrawals are made. (Sometimes this person is called the “participant.”)
2) Beneficiary: the person who uses the money to pay for qualified education expenses. The beneficiary can change over time.
The account owner has complete legal ownership of the money in the 529 plan, NOT the beneficiary- even after the beneficiary turns 18 years of age.
Anyone who has ever met a teenager understands why this is a good idea….
Who Can Make Contributions?
Everyone! In fact, young parents have started “crowd-sourcing” their children’s college savings plans by encouraging grandparents, uncles, aunts, etc. to make contributions as a birthday or holiday gift.
Thanks to the power of compound interest, early contributions will grow to larger dollar amounts in the years it takes Junior to finally reach college-age. Like… a LOT larger amounts.
Where Can I Open a 529 Plan?
If you want to open a 529 plan, Bodnar Financial can help. Contact us today for a free consultation on your financial planning needs.