What is a 529 Plan, and Why Should You Care?
What Is a 529 Plan, and Why Should You Care?
Knowing the answers can help shape your child’s future
Raise your hand if this conversation sounds familiar:
“So, Janice, have you set up a 529 plan for little Noah? We set one up for Emma right after she was born. I don’t want her to have to deal with college loan debt like I did.”
Perhaps you shake your head and say something like, “Not yet, but we plan to.”
At this point, the conversation moves to inside your head:
(529 plan, what’s that? College debt? My child is only two years old. No one told me about this 529 plan. Can we afford it?)
First of all, breathe. Plenty of people don’t know what a 529 plan is. The fact that you’re reading this is already giving you a head start. Keep reading.
So … what is a 529?
Simply put, a 529 plan is one of the most effective ways to save money for higher education including four-year universities, community colleges, and technical and vocational schools. Why? Because a 529 plan is a tax-advantaged savings plan. Less taxes? That’s appealing.
529 plans were created to help parents, grandparents, aunts, uncles, etc., save for a child’s future education costs.
Often referred to as a “savings” account, 529 plans are essentially investment accounts. And you can be as involved as you want to be. If you’re a savvy investor familiar with things like stocks, bonds and mutual funds, you can be more hands-on with your account. If investing isn’t your cup of tea, plan-appointed investment experts have developed various investment options that allow you to choose a strategy based on your preferred risk tolerance.
Your preferred “risk tolerance” is something that you determine when you set up your 529 account. For example, there are preset investment options based on your child’s age, so the more time between when you open the account and when your child goes to college, you can choose to opt for riskier allocations, like stocks. If you have less time until your child is college aged, you can consider investing more conservatively, with things like federally insured certificates of deposit (CDs).
Increases in value of the savings/investment are tax-exempt when they are used to pay for qualified higher education expenses, including tuition, books, room and board or any required equipment at an accredited college.
Important note here: If it is YOU who opens the 529 account, then it is YOU who controls the account, and it is YOU who decides which of your college-aged children gets to use the money in it.
Another important note: 529 plans are administered by states, state agencies and educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans:
- College savings plans, which are the most commonly used 529 plans, are what we talked about above. They let you open an investment account to save for the account beneficiary’s college or other qualified higher education expenses.
- Pre-paid tuition plans, let you purchase tuition at participating colleges or universities based on current tuition prices. That means if you want little Noah to go to the University of Florida in 2034, you can lock in today’s prices now to be used in 2034. With the rising cost of attending college, this is a useful option to have. There are different kinds of prepaid plans and not all states offer them. You can find out everything you need to know about prepaid 529 plans here.
Why should you care about 529 plans?
Because 529 college savings plans are one of the few savings options that are specifically dedicated to helping families get their loved ones into higher education.
If you are setting up a college savings account for a loved one, that’s a big deal. If you or someone you know has had to pay back a college loan debt, you are probably familiar with the challenges that often come with that obligation. By setting up a 529 plan, you are helping ease the reliance on student loans and the stress that can come with paying them off.
Again, remember those tax savings. The money in a 529 plan grows free from federal income tax, and withdrawals remain tax-free when used for qualified higher education expenses. Additionally, many states mirror the federal 529 plan tax advantages by offering state-tax-deferred growth and state-tax-free withdrawals for qualified higher education expenses.
A 529 college savings plan is many things. We mentioned one very important aspect, which is that it offers tax incentives. But a 529 plan is so much more than that.
- You can open a 529 college savings plan with as little as $10 or less, depending on which state’s plan you use. There are no income limitations on a person’s ability to contribute to an account.
- Money in a 529 plan can be used at virtually any accredited college or university in the U.S. and at some foreign schools. Hello, Paris! See eligible institutions here.
- You can participate in almost any 529 plan across the country, no matter what state you live in.
It’s important to remember that each state has its own plan, and those plans vary from state to state. The best place to start is with your state’s 529 website, which will include a phone number to call if you have questions. Make the call, ask questions, be a part of the debt-free college savings movement.
You can find your state’s 529 plan online by searching for your state here.
And for more on 529 plans and how they work, simply surf around this website. There are more explanatory blogs and tools like our college savings calculator below.