15 Things to Know About 529 Plans

If you’re a parent old or new, you may have heard of, or even already contribute to, a 529 savings plan. For those who have never heard of this, the 529 savings plan was started in the 1990s to help parents begin to save for an increasingly expensive higher education for their children.

Currently, not too many people take advantage of the 529 program, but if you have children, it could be beneficial in multiple ways. Here’s are some things to know about 529 plans:

1. Your contributions are not tax deductible.

Any money you contribute throughout the year to your child’s 529 plan is not tax deductible but grows tax-free.

2. Qualifying withdrawals are often tax-free.

When you’re ready to make a withdrawal from your child’s (or your own) 529 account, expect to pay few or no state taxes (depending on your state) and no federal taxes.

3. You can choose a prepaid plan.

As one of two different types of 529 plans, a prepaid plan allows families to buy “units” to be cashed in when your child starts school.

4. You can choose a savings plan.

A savings plan may require smaller contributions and grow over time. This is ideal for families in lower income brackets because it allows you to save smaller amounts of money and still contribute potentially large sums toward education down the road.

5. They provide tax-deferred growth.

While most of us would love a way to save money that’s fully tax-free, it’s just not possible. However, a 529 plan comes close. Any growth on the account will be taxed at a later date

6. There’s very little risk from an investment standpoint.

Because your investment is smaller than other types of investment plans, you stand to lose less money if the market crashes.

**7. However, there is some risk.**

If you choose a traditional 529 plan rather than prepaid, your savings will grow and/or shrink with the markets. This could be problematic if the U.S. experiences another recession like the one that began in 2008.

8. They can be used for more than just college now.

With the passage of the recent Tax Reform Bill, parents who have 529 plans for their children can now apply these funds to elementary and secondary education. For example, if you choose to send your child to a private religious institution for elementary school, you can now use funds from a 529 savings account to offset the cost.

9. They might not cover the costs of college by the time your child gets there.

College becomes more expensive every year, making it increasingly difficult for prospective students to afford an education. So, starting a fund for your infant child now may not end up being enough to offset the inevitably higher costs when your child finally reaches college age, meaning they would need to take on student loan debt.

10. Plans vary depending on the state in which you reside.

Some states offer incentives for individuals to sign up for 529 plans in an effort to decrease our collective national student loan debt. Check here to see what your state offers.

11. They will impact the financial aid your child is eligible for.

While a 529 plan won’t make your child ineligible for financial aid, it will be considered as available assets when determining how much they are eligible for.

12. You can use the funds to cover the costs of computers and related educational equipment.

Necessary related equipment, such as laptops, are eligible for purchase with 529 funds. Sales tax will still apply, however.

13. They’re transferrable.

Whether changing beneficiaries or rolling over remaining funds into a different account, you might be pleased to learn that these accounts are transferable. However, this does come with some caveats. For example, you can only roll over the account tax-free one time in a 12-month period.

14. You must have a social security number to sign up.

If you’re currently childless, but will have one soon, or plan to have one in the near future, you might be anxious to get a jumpstart on this plan. However, the beneficiary must have an SSN in order to open the account. This does not mean you can’t open one while pregnant, you will just have to make yourself the beneficiary until your child is born and assigned their own SSN.

15. Pricing can vary depending on who sells the plan.

There are two ways to buy a 529: through a broker or through a financial institution. Brokered plans can be a bit pricier, but you may end up saving money on taxes and more in the long run. Additionally, a broker can walk you through the fine print of how and when you can make withdrawals.

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