529 College Savings Plan

529 College Savings Plan: I’ve a daughter, she’s only two year’s old and all she cares about right now running around the beach and riding her scooter in our neighborhood but one day that’ll change she’ll grow up and want to be a doctor or an engineer or maybe even a pro golfer whatever her aspirations are I know that there’s a good chance that she’s going to want to go to a college or a university to accomplish her goals.

And as a parent I want to make sure that she gets there and one of the best things that I can think of to help her get the education that she needs is to invest in a 529 education fund so today’s article I’m going to go over exactly what a 529 is and walk you through the different key factors that you should be looking for when you’re considering opening one up so let’s dive right into…..

So let’s start off our conversation on what a 529 is…. simply define a 529 is a state sponsored tax advantaged education saving plan designed to be used for qualifying educational expenses, including school tuition, room & board fees, books & supplies and even college meal plans.

The first 529 plan was founded at the Michigan education trust in 1986 as a college tuition savings plan but over the years as more 529s began to emerge the definition has grown to cover more types of education expenses and most recently in 2019 this vehicle’s scope expanded to include k-12 private school tuition as well as registered vocational and trade school tuition like culinary institutes, cosmetology academies and film schools.

529 College Savings Plan

Oh and by the way in case you’re curious it’s called the 529 plan because the section of the internal revenue code that authorizes this type of savings plan is section 529. Now let’s take a deeper look at which expenses qualify under this programme.

As we discussed you can now use your 529 to pay for a wide range of educational institution from k-12 private schools to colleges and even vocational and trade schools if you go to this federal school look-up tool on savingsforcollege.com you can actually look up just about every single school and institution that qualifies under the 529.

529 College Savings Plan Calculator

Simply fill in the details on the form here and you’ll get a comprehensive list of school to review. In terms of what types of expenses qualify under a 529 here’s a list of the things are include. The first is school tuition fees and student loan payments that’s right you can even pay off students loans with a 529.

Next is room a board which includes both on campus and off campus housing options third are your food and meal plans fourth is books and educational supplies like notebooks, pens, calculators etc. 

Then we have computer software and certain education related tech products although for this one you have to have some documentation saying that this is a necessary educational need for your institution.

For example the design media art school at UCLA has a laptop requirement document that outlines what type of laptops students will need to be successful in their coursework. If you have something like this then these purchases would count under the 529 plan.

How To Open A 529 Plan

Next is internet service a lot of people are unware that internet service is actually seen as a necessary tool for education and thus qualifies under 529 usage and seventh is any special needs equipment or accommodations that a student might need.

In order to effectively engage in their coursework this includes wheelchairs certain types of transportation costs etc. Here are a few things that you would think should qualify under a 529 expense but actually don’t the first is transportation and travel so for example:

Buying a plane ticket to fly from school to home and vice versa wouldn’t be covered as a qualifying 529 expense also smartphones I-pods cameras and any other general everyday use electronics would typically not be covered under a 529.

Unless your studies specifically documented the need for such devices next gym’s sports club memberships are excluded here as well. But in most large university an on-campus gym membership is usually included in tuition so this might not be such a big deal. Lastly any health insurance for a student is generally not covered here either under the plan.

Now that you know what a 529 is and what its purpose is let’s talk about some of the unique features of this investment vehicle.

First there are no yearly contribution limits to a 529. Unlike an IRA or an HAS that has a specific contribution amount that can’t be exceeded but 529s usually have a total value cap for the entire account so for a 529 you can contribute as much or as little as you want each year but only up to a total account value limit which is usually in the area of around 500000.

Best 529 College Saving Plan

Next these plans generally come in two different flavours a prepaid tuition plan and an education savings plan. A prepaid tuition plan works exactly like it sounds. It allows the accounts holders to purchase credits at participating schools usually public colleges that are in state for future tuition and other fees involved with enrolment the benefit of a prepaid plan is that it allows you to purchase these credits at current prices.

So that if the price of tuition rises later on you would have paid a much cheaper amount for that same credit the only downside to this approach is that you can’t invest your money  because you’re not putting it into an investment account.

529 College Savings Plan Indiana

But rather they’re being stored as purchase tuition credits at a particular university and for this method you have to select and be locked into the school that you choose from the Benning as these credits are generally not transferable to any other school.

But if you look back at history the prices of tuition nationally have gone up 25% in the last 10 years so if you’re certain about what school your beneficiary wants to go to in the future prepaying for tuition credits can be a pretty smart move the second 529 flavour is the education savings route and in this method the account holder opens an investment account and saves for the beneficiary’s qualified educational expenses future.

Very much like an IRA or an HAS and from a tax perspective, the 529 is a double tax advantaged account where you can contribute after tax dollars and it’ll grow within the account tax free and withdrawals from the account are also tax free as long as it’s for qualified educational purposes.

529 College Savings Plan Tax Deduction

The third thing to note about this programme is that there’s no one national plan because 529s are all state sponsored meaning state has and runs their own program now this is really important to understand because for a prepaid tuition programme while you can choose any state’s plan.

This means that you have to pick a specific school to contribute to and when you’re ready to reap the benefits of your contributions i.e. use tuition credits that you paid for you can only use it for that particular school and in the prepaid tuition route when it comes time for you to use the funds some programs might actually require you to be a resident of that state.

Which means you’d likely have to more there if you opened up a prepaid 529 plan in any other state besides the one you’re currently residing in far more flexible in the education saving plan.

In this one you can contribute to any state program and withdraw and use the funds for any other state educational expense regardless of where you live so as an example you could be a resident of say TEXAS and set up a 529 in California or be a resident or Michigan and open up an account in Alabama and in either of those cases you could make withdrawal and pay for tuition in New York.

If that’s where your beneficiary decided to go so then an obvious question you’ll want to ask is if in the education saving plan. I can use the funds for any state school my beneficiary wants to go to. Does it really matter which state program I initially sign up for and participate in.

529 College Savings Plan Tax Benefits

Well the answer to that question is actually yes and here’s why there are two main considerations to make when you’re choosing the wright state sponsored education saving plan.

The first is Local Tax Consideration you see if you live in a state that has state income tax most of those states offer some type of local estate tax deduction for contributing to a 529 program and in this case your contributions would be partially tax free.

Because of this deduction benefit but one thing you have to watch out for is that certain states may require you to then use those funds within their own state or pay back some of the tax deduction amount later in distribution.

So you’ll want to make sure and you check with a fine print before going with your state’s 529 plan. If you’re in it for the upfront tax savings the second consideration is investment choice and account performance.

You see each state’s 529 is powered the back end by a certain brokerage or financial planning firm that the programme has a partnership with and through that partnership. There are usually a specific set of investment options that are uniquely provided for the programme and these choices are typically objective or risk based portfolios that they create and manage on your behalf.

These portfolios usually have a collection of underlying mutual funds or bond funds and their mix determined by the portfolios strategy here’s an example of some investment choices with New York’s 529 plan.

529 College Savings Plan Tax Benefits

529 College Savings Plan Ohio

As you can see it looks like this programme partnered with vanguard for their investment vehicles and it seems like they offer a good mix of growth and balanced investment strategies in their offering one thing to remember is that because you don’t have much say in what the underlying funds are within your portfolio since it’s managed by the program itself.

It’s important for you to make sure you look at the performance of these funds over time. Before you commit to a particular state’s programme there’s usually a historical performance section in most 529 sites where you can get a comparison of how each portfolio does against their underlying benchmark.

If you do some research you might be surprised to see how much of a difference the portfolios performance can be across different state programs so make sure you invest a little bit of time to do some comparisons between state 529s before you commit one.

Lastly let’s briefly cover the logistics of setting up a 529 account. First before you decided to sign up let’s talk a little bit about who can be a beneficiary for the account.

Most people think 529s are only for parents who are planning out long term education goals for their young children but the truth is the IRS definition of a beneficiary for the plan is pretty broad and include….

  • Spouses
  • Sons, daughters, stepchildren, foster kids, adopted children
  • Sons-in-law, daughters-in-Law
  • Siblings or step Siblings
  • Brothers-in-Law, Sisters-in-Law
  • Father or Mothers
  • Fathers-in-Law, Mothers-in-Law
  • Aunts, Uncles
  • Nieces, Nephews
  • Or any first cousins.

529 College Savings Plan California

While a 529 plan can only have one beneficiary at a time switching beneficiaries can be done at any time you want without any tax implications as long as you continue to use the funds only for qualified expenses.

So once you know who your beneficiary is going to be in terms of actually signing up for an account the easiest way I’ve found to this is to go directly to each state’s 529 website and register directly. This is the best way because it’ll provide you the most comprehensive detail on that particular state’s program itself not just on the investment piece and are usually the most informative when it comes to detail and insights on how you can make your dollar go the furthest within that specific state’s 529 plan.

All you have to do is simply fill out the registration form and agree to open up an account with their partner and brokerage firm to hold your investments in which happens pretty much automatically as part of the registration process and just choose which investment strategy you want your contributions to follow.

And that’s it it’s no different than signing up for a brokerage account or an individual retirement plan at a financial planning firm.

So that’s it for today’s session of AJeet’s brew if you found this 529 guide helpful comment below and hit the share button with your friends.

6 thoughts on “529 College Savings Plan”
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