In my earlier post, I wrote about ways to fund your child’s college education. One of them was opening a 529 account. In this post, I will talk about what these plans are.
529 plan is a tax advantage account, where people invest money to fund the college education of their kids. You can open an account for your education as well.
529 plans are state government-sponsored plans and each state has its plans.
Advantages of 529 plans
The first advantage is that you invest your post-tax money and it grows tax-free. This is similar to a Roth IRA or 401 K. The other advantage is that there is no maximum contribution limit.
Additionally, if the original beneficiary can’t use his account for any reason, there is an option to change the beneficiary anytime.
Who can open the account?
Mostly parents or grandparents open this account to fund money for their child or grandchild’s higher education.
Anyone with a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) can open this account. Though non-U.S. citizens living outside the U.S. can’t open the account, they can still contribute to a child’s 529 plan.
Also, anyone can contribute to a 529 plan, a grandparent, a friend, or a relative.
Only U.S. citizens or resident aliens with a Social Security Number or Individual Taxpayer Identification Number can be the beneficiary.
Also, you don’t have to be a resident of that state to apply for that plan. Most states offer it to both residents and nonresidents. However, there are six 529 plans that are only available to in-state residents:
- Connecticut Higher Education Trust (CHET) Advisor Plan
- Florida 529 Savings Program
- Louisiana START Saving Program
- New Jersey NJBEST College Savings Plan
- South Carolina Future Scholar 529 College Savings Plan (Direct-Sold)
- South Dakota CollegeAccess 529 (Direct-Sold)
Two types of 529 plan
- Savings plans: This is where you are building up money, which you can use toward almost any college tuition and related expenses in the US. This can also be used for K-12 education as well.
- Prepaid tuition plans: This lets parents lock in today’s tuition rates for a child’s future education (but may limit where a child can go to school). The money can’t be used for room and boarding.
Choosing the right 529 plan
Savings plans tend to be more popular than prepaid tuition ones, as they are less restricting. Not all states offer prepaid tuition plans.
Many families choose their state’s plan because their state can offer more tax benefits to them. However, you are free to choose any state’s plan. One tip is to compare different plans and choose the one with a low expense ratio.
Disadvantages of 529 plan
Since the money invested should only be used for education purposes, if you use it for anything else, you pay a 10% penalty and will owe taxes on the capital gains.
Also, you can’t control which assets these plans invest in.
Should you invest in 529 plan?
Despite these limitations, it is still a great plan for funding college education if you think your child will go to college.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice.
