Basics of a 529 College Savings Plan

Contributing to a 529 college savings plan is a great way to save for your child’s future.  The 529 plan is a type of investment account, typically state sponsored, that is used as a savings for higher-education.  Eligible education institutions include 2 and 4-year colleges, post-secondary trade and vocational schools, and postgraduate programs.  The money can be used for most education expenses including tuition, supplies, books, equipment, and certain room and board fees.

529 Basics

  • Individuals contribute after-tax dollars that grow tax free.
  • Anyone can act as the owner of the plan and name a child or grandchild (or anyone else, including themselves) as the beneficiary.
  • A parent or grandparent can contribute to any state’s plan, but some states allow residents to claim a state-tax deduction for all or a portion of 529 contributions.
  • Investors are restricted to the investment options within a state’s plan.
  • The owner (not the beneficiary) retains control of the 529 assets.
  • 529 earnings can be withdrawn free of federal taxes for qualified college expenses (see below for more details). If 529 earnings are withdrawn for expenses other than college, they will be subject to income tax and a 10 percent penalty.
  • 529 plan assets are not treated as a child’s personal assets for federal financial aid purposes, even if the account is owned by the child. However, 529 plan assets are treated as a parental asset (even if it is owned by the child). The bottom line here is 529 assets do affect financial aid eligibility, just not as much as if they were considered the student’s personal asset, and not as much as most seem to think they do.

Qualified Expenses

In order for the distribution to be considered qualified, a 529 account can be used only to pay for expenses that are related to college or other post-secondary training institutions. Textbooks are qualified, but only those included on the required reading list for the course. Tuition and room and board are qualified expenses, as long as they do not exceed the greater of the following two amounts:

  • The allowance for room and board included in the school’s cost of attendance for federal financial aid calculations
  • The actual amount charged if the student is living in housing operated by the educational institution

By no means is it my intent to dissect each option that a new parent or a parent of a child about to enter college (or all parents in between) may have. For example, if one is interested in saving for private school prior to college, a Coverdell ESA is likely the best choice. The maximum amount that may be contributed to an ESA on behalf of any designated beneficiary is $2,000 per year. There are many different potential solutions for parents based on their needs. It should be well understood, that while 529s are a great option, they are not always the best option. Should any of you have any questions, please do not hesitate to contact Claris.

If you’ve decided to contribute to a 529 plan, find out how to choose the appropriate plan for you.

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