529 plans are college savings accounts that provide financial aid and tax benefits. In addition to college expenses, 529 plans can also be used to invest and save for k-12 tuition. There are two kinds of 529 plans: prepaid tuition plans and college savings plans.
A 529 plan is an excellent way for you to begin saving for your children’s college education early. Plans are accessible in all 50 states of the U.S., with plan administrators delegated to select investments that they believe are right for the state’s program, potentially leading to a smoother investment process and reduced fees arranged thanks to community buy-ins.
Although each state has a 529 plan, they are not similar. The best college savings plans charge the lowest rates and provide a greater range of investment alternatives.
History of 529 Plans
The 529 plan was first established in 1986 by the Michigan Education Trust. It was a prepaid tuition plan. The name 529 plan arises from part 529 of the Internal Revenue Code that approves tax-free grading for qualified tuition programs. 529 plans earnings accrue on tax-deferred grounds and are not taxed by the government when used for qualified education expenses.
Although they were initially meant for college savings, today, 529 plans can be used for K-12 expenses in some states. Over the years, the definition of eligible higher education expenses was updated to include computers. You can now make tax-free withdrawals of up to $10,000 annually to pay for eligible higher education expenses.
7 Benefits of 529 Plans
Federal Tax Breaks
Earnings of 529 plans are not federally taxed, provided you use it for eligible higher education costs, K-12 tuition, vocational school, and apprentice expenses or fees. Eligible higher education costs include fees and tuition, board and room, computers, and books.
State Tax Breaks
In addition to the federal tax breaks, more than 30 states currently offer tax deductions or tax credits for contributions to 529 plans. You will generally receive state tax breaks every year you contribute to your 529 account. Therefore, it’s a great idea to keep making contributions until you pay off your tuition bill.
Make sure you research all available options. If you live in a state that does not offer tax breaks for 529 plans, you can select another state’s plan.
No income-based limitations
Some education tax incentives, such as education tax credits, have a maximum income limit to be eligible, meaning not everyone will enjoy the tax benefits. 529 plans don’t have such limitations. Regardless of your income, your 529 earnings will not be federally taxed.
Ability to Modify Investments
529 plans are flexible as you can change your investment twice per financial year. You can also transfer your contributions into another 529 account once annually.
Prepaid Tuition
Nearly a dozen states provide guaranteed tuition schedules that allow you to save for future tuition at current prices. This will enable you to avoid tuition price inflation and hikes. You should compare each state’s plan to find out whether your home state provides prepaid tuition plans.
Age-based Options
To build a good 529 savings plan approach, you don’t need to be an investment specialist. You can pick a bundle of investments based on your child(s) ‘s age and your level of risk averseness. If you are cautious about losing money on your investment, you should go for a conservative plan that is minimally exposed to the stock market.
Flexibility of Use
Earnings from a 529 account can be used for qualified trade schools, apprenticeship programs, and continuing education institutions. Leftover 529 plan earnings can be used to repay student debt loans up to $10,000 or undertake a course to further your career.
A 529 plan will enable you to set apart savings for various academic needs while still enjoying the advantages of federal and state tax benefits for plan contributors and holders. A 529 account is relatively easy to open. You should research your state’s 529 tax benefits guidelines and ensure you select a qualifying plan.