One of the most important things parents can do for their children is to save for their college education and one of the best ways to do that is to avail of the 529 College Plan.
A 529 Plan is an educational plan run by the state or an educational institution which is authorized by the Internal Revenue Code’s Section 529. The plan allows the parents or the account holders to set up a college savings account for a child which is to be used to pay for tuition, room and board, mandatory fees, required books, and computers.
The amount contributed to the account can be invested in stocks, bonds, or mutual funds. Its earnings, when used solely for college expenses, are not subject to federal taxes and in most cases, state taxes as well.
Every State has its own 529 savings plan with its own unique features. Any individual can open a 529 plan in any state even if it is not your state of residence.
There are two types of 529 plans: the pre-paid tuition plans and college savings plan.
The prepaid tuition simply means purchasing future tuition at today’s rate. It lets you pay a one-time lump sum or monthly installment payments for the cost of an in-state public college education. It may also be converted for use at private and out-of-state colleges. There is a separate prepaid Private College 529 Plan for private colleges.
The savings plan works like a 401k or IRA by investing your contributions in mutual funds or similar investments of your choice. Your account will change in value based on the performance of the particular option you have chosen.
529 Plans aim to encourage early and consistent savings by providing an easy, affordable, and convenient way for families to save for a college education. More than the tax advantages, there are other benefits attached to 529 College Plans:
-If the beneficiary decides not to go to college or gets a full scholarship, the plan can be transferred to another individual.
-The program makes investments to enable the earnings to meet or exceed college tuition increases in the future, thereby lessening the impact of inflation.
-You can contribute to a 529 College Plan for a chosen beneficiary, such as nephews, nieces, grandchildren, godchildren, or any individual of your choice.
-You can participate in a 529 Plan regardless of income, and in most states, regardless of age of the beneficiary.
-The plan can be applied to any accredited college in the country. Your beneficiary can pick a school in another state even if you purchased your 529 Plan in your state of residence. Just take into consideration that restrictions may vary from state to state.
Earnings in a 529 Plan are free of federal income when used for “qualified higher education expenses” under the Internal Revenue Code Section 529. Qualified higher education expenses include tuition, mandatory fees, books, supplies, and equipment required for enrolment or attendance.