The cost of going to college continues to get more expensive every year. According to the College Board, higher education costs increased about 3% from last year and as much as 40% from 2005. For example, the annual cost to attend Harvard University as an undergraduate student was $40,000 in 2005, but now carries a $60,000 price tag.
As a result, it's become more important for families to prioritize saving for their children's education. One particular vehicle that could be advantageous for saving for college is a 529 plan.
”Congress created 529 plans to help families save for college on a tax-advantaged basis,"said John Hupalo, CEO of Invite Education, a company providing information and tools to help families better plan and pay for college. "Today, about 11.4 million people have saved over $220 billion in these plans - sometimes $25 a month starting when their children are very young so the investment can grow tax-free for many years."
A 529 plan gets its "catchy" name from the section in the Internal Revenue Code that authorizes its existence. 529 plans come in two flavors: a prepaid tuition plan and a college savings plan. To determine is the latter is for you, you must take stock of the information presented below.
A 529 Savings Plan Carries A Lot of Flexibility
In general, 529 savings plans are extremely flexible with fewer restrictions than other types of tax-advantaged investment vehicles. For example, most plans allow any U.S. resident at least 18 years of age or older to open a 529 savings plan, and there are no income restrictions for making contributions. In fact, the Obamas have four 529 savings plans, each with balances carrying $50,000 to $100,000, according to the president's financial disclosure forms.
A 529 savings plan can be opened to save for a child, grandchild, younger relative, or even for yourself - there's no age limit for the beneficiary of a 529 savings plan. Even better, you can change the beneficiary on an account at any time for any reason, so if you find that one child doesn't need the funds for college, you have the flexibility to change the beneficiary to another member of the family.
"The donor's ability to switch beneficiaries is a tangible way of ensuring that their goal of supporting family members' college dream is fulfilled," Hupalo added. "If the designated beneficiary decides not to attend college or if money is somehow unused in an account, the donor can still leverage the investment by re-designating the 529 account to another fortunate beneficiary. That's very powerful."
While all states and the District of Columbia have 529 savings plans, residents don't necessarily have to limit themselves to plans in their home state. They can shop around and choose the plan that best suits them. However, as discussed below, many states provide a state tax deduction for contributions, so it's often times beneficial to contribute to your state's plan.
Once enrolled in a particular 529 savings plan, account holders have the option to roll over their proceeds to a different plan once every 12 months. But be careful: if you initially invested in your state's plan and received a state tax deduction, certain states will recapture that tax benefit if your monies are rolled out of the state plan.
Ultimately, funds within your 529 savings plan can be used for qualified expenses at most accredited colleges, graduate schools, professional and trade schools, and foreign schools, as long as the institution is eligible to participate in the student aid program administered by the U.S. Department of Education. You can check if a school is eligible through this handy lookup tool. Qualified expenses generally include tuition, fees, books and supplies, room and board and equipment required by the educational institution.