529 Education PlansWhat is a 529 plan?529 education plans are similar to Roth IRAs, but instead of that money being saved for retirement it is being saved for college. Let’s face it, college is expensive and it isn’t getting any cheaper. If you want to be able to pay for your child’s college without taking on massive debt this is a great option. So, what is a 529 plan and what are the 529 plan rules and regulations? This plan is set up by either the state or specific education institution in order to help pay for all of the expenses of college. Basically there are two different types of plans. 1. 529 Savings Plan This is similar to a Roth IRA any money in here can be invested into whatever options the specific plan gives you. Normally you will get to choose between different kinds of mutual funds to invest your money into. Only state governments can offer this kind of plan and every state will probably have their own version of it. 2. 529 Prepaid Plans These allow you to prepay for college credits and thus distributing the cost of college over years. This is the only plan that educational institutions are allowed to offer but your state may also have a version of this plan as well. Tax Advantages According to the 529 plan rules you cannot write off any of the money that you deposit into this account. But you do get a tax break on the interest. All interest that is made from money invested into 529 education plans is not subject to federal tax. Depending on your plan it might, however, be subject to state tax. Some states may charge you taxes on the money if it is being used for a college in a different state then the state the plan was set up in. Also if it is not used for a qualifying education expense such as tuition you will have to pay taxes on that money in addition to a 10% penalty. So basically don’t go buying a new car and calling it an education expense. What are the requirements? State plans are very lenient; you may open up a 529 account regardless of age or income. You may open up an account for your kid or for yourself if you wish. College plans are a little different because their plans have limited enrollment and you may have to meet their requirements. 529 plan Contribution Limits Each plan may have their own contrition limit, but this is generally pretty high and some will allow you to invest a maximum of $100,000 - $300,000 into the plan. Who Sells 529 Plans These plans are provided by individual states and schools. In order to set up an account you can either talk to a 529 plan administer or a financial advisor. For more information on 529 education savings plans visit http://www.sec.gov/investor/pubs/intro529.htm the official government website. |
