Based on findings, a lot of Americans are still paying off students’ loans, and you don’t want that for your kid. As a parent or guardian seeking ways to secure your child’s college education, there are tested and tried ways to do that. One of such ways is the 529 college savings plan. This blog also contains a summary of what the 529 college savings plan entails. Read on to discover more!
What is a 529 College Savings Plan?
Quentin Freeman an associate member of the U.S Secretaries and exchange commission defined the 529 college savings plan as a tax benefit savings plan that enables investment for future educational costs. In other words, it is a qualified tuition plan in which the money paid is exempted from tax or deferred from it when used solely for the stated purpose.
How Does 529 College Savings Plan Work?
The saving plan is a state-sponsored saving scheme that allows parents and guardians to save money for their beneficiary – children or ward – educational purposes. Moreover, “the money you save is used only for qualified educational purposes, as defined by the plan”.
Types of 529 College Savings Plans
There are two kinds of 529 college savings plans; First, prepaid tuition plan; second, educational savings plan.
1. Prepaid Tuition Program
“This type of plan allows you to buy credits from participating college at a “now” price for later use,” says Quentin. In order words, you enjoy cheaper educational rates when you purchase the credit now for future use.
The downside to this program is that;
- You can purchase college credit only from colleges that support the program
- You cannot transfer college credits, it can only be used in colleges it was purchased from
- The program only supports tuition payments, not boarding expenses or pre-college educational expenses like elementary school and high school.
2. Educational Savings Plan
Unlike the prepaid tuition program, educational savings allows you to save up the money in form of an investment, rather than purchase college credit. “The money deposited into the educational savings account yields an annual interest of 5%”. If a deposit of $15000 is made annually, the interest generated is $7500.
Additionally, it has the advantage of paying for other educational expenses besides college tuition. Like K-12 education and student loan.
Benefits of 529 College Savings Plan
1. Tax Advantage
“This part is the most attractive part of the plan,” he says. The money saved in the 529 plan grows without added tax as long as it stays in the account. In other words, the plan is tax-deferred. In addition to that, when you take out money for educational purposes, the money is also non-taxable.
2. Also Covers Added Educational Expenses
Recently, adjustments have been made to the 529 plan to make room for more expenses too. Now, the plan can pay for K-12 education even in private schools, pay for boarding costs, and other educational costs.
3. Is Transferrable
In case the beneficiary becomes disabled and cannot go to college, you can transfer the savings to an ABLE (Achieving Better Life Expectancy) account as Medicaid for that beneficiary.
4. Can Pay for Student Loans
It’s a saving plan that can be used to pay up student loans for the named beneficiary or other children related to them. However, a sum of an overall sum of $10000 is used per individual, no more than that.
5. Covers Educational Expenses Besides Tuition
There are other kinds of educational expenses not school-related, such expenses are called apprenticeship expenses. These expenses include books, equipment, and fee used for taking part in the program. Also, 529 plan can cover such expenses.
6. The Beneficiary Can Be Changed
This college savings plan is flexible. When a beneficiary completes college education or decides not to attend college, the savings plan has an option that allows a new beneficiary to be named as far as they are related to you. All you need to do is fill in some paperwork.
Best 529 College Savings Plan
Freeman picked out some best 529 plans based on tax deductions and annual fees. Here are his top picks:
1. The Unique College Investing Plan
Although there are no tax benefits (new hemisphere does not charge income tax), this plan offers the highest contributing limits of $522,000 to cover the wider educational expense, in line with Massachusetts’ plan. It charges maintenance of 0.09%-0.2% annually
Moreover, it offers tax deduction benefits of $10,000 for couples and $5,000 for single account owners. This plan has a maximum limit of $520,000 yearly per beneficiary and a flat maintenance fee of 0.13% for all kinds of savings investments.
2. Ohio’s 529 Plan
Ohio’s 529 plan has a low management fee, no enrollment fee, and a 0.02% administration fee. Moreover, the plan has minimum limits of $25 and a maximum limit of $400,000.
3. Oregon College Savings Plan
Oregon offers tax deductions as little as $150 for single and double of that for couple filers. Nevertheless, they have a minimum saving balance of $5 after $25 initial savings. The maximum balance is set at $482,000 with a 0.25% administration fee.
4. U.Fund Massachusetts 529 Plan
U.Fund is powered by MEFA (Massachusetts Education Financing Authority). Moreover, it has tax deductions of $2,000 and a maximum limit of $400,000 per beneficiary. It also charges as little as 0.09%-0.2% per annum.
Pick Your Next Read: 7 Best Online Colleges That Pay You To Attend
Frequent Ask Questions
1. Is There Any Limit to the Plan?
There are no annual limits to what you pay for a 529 plan, but there is an overall limit for the plan. The limit is the stipulated cost of education for five years and it is different for each state.
2. What Happens When Limit is Exceeded?
Any money added after reaching the limit is not considered as part of the plan and is taxable. Moreover, it is not unusual to give a down payment for the plan, but such payment must be stated as a down payment to avoid gift tax – tax paid on money transferred as a gift.
3. How Many 529 college Savings Plans is Needed?
The number of kids you have determines the number of savings plan you need. But you can use one saving account for other kids when you transfer benefits – you can only do that twice a year. Although it’s easier to run a single 529 college savings account, regulating the money between beneficiaries is not so easy, not to mention the paperwork attached. What you need is one beneficiary to one plan.
4. What Happens When Non-Educational Withdrawals are Made?
The money becomes taxable in two ways. Firstly, you pay tax on the earning; secondly, a 10% penalty for withdrawal.
5. Can 529 College Savings Plan, Be Gotten Back?
529 college savings plan can be gotten back without tax in a scenario where the beneficiary attends a military academy or receives educational assistance like a scholarship. But only the amount equal to the scholarship can be withdrawn.
Worst case scenario, you withdraw the savings and pay tax on it. With the 529 college saving plan, you can guarantee your child a college future with less financial burdens when the time comes. You should join the list of parents already try it out.
