Whether you already have children or you’re planning to start a family soon, you have probably pondered your kids’ futures and wondered how you can smooth their pathway to higher education. Many parents consider it part of their responsibility to help fund their child’s college tuition. It’s one way of setting your kids up for success in their chosen careers. But with the mounting cost of living and the soaring price tag for college tuition, some parents just aren’t sure how to start saving for their kids’ college funds.
That’s where a tax-saving education savings plan comes in. These plans, often dubbed 529 plans, help parents set up savings accounts with special benefits, intended to help provide for a child’s future education.
What Makes 529 Plans Unique?
One of the best parts about a 529 plan is its federal tax status. Created in 1996, these special plans offer a tax-deductible means for parents, grandparents, and other relatives or friends to set aside money for a young beneficiary. The money from a 529 plan is completely tax-deductible as far as the federal government is concerned. States have their own specific regulations governing the usage and deductions for 529 accounts.
Who Can Open a 529 Account?
Anybody with U.S. citizenship can set up a 529 plan, as long as the person is over 18 years of age. Resident aliens over 18 years old can also participate and create such an account.
Who Is Allowed to Benefit from a 529 Account?
Although most beneficiaries are young people, the government doesn’t specify any age limit for beneficiaries. In fact, you could set up a 529 account to save money for your own higher education bills.
What are the Available Varieties of Education Savings Plans?
When you start investigating in 529 plans, you’ll discover that two primary categories exist. In one category are the prepaid tuition plans, which enable you to lock in on the current price of tuition at your institution of choice. Since tuition rises annually for most colleges and universities, this type of plan can result in significant savings. However, these plans do not account for expenses such as books or room and board.
Another type of plan is the college savings investment plan, which allows you to invest money in mutual funds, stocks, or bonds. As you explore your options for a plan of this kind, you will face the age-old dilemma— how much should you risk in order to increase your potential for higher profits? Consult with a trusted financial advisor before making a decision.
How Is the Money Used?
There are guidelines in place to prevent people from misusing the 529 plans. For example, money from a 529 account may only be used to pay for qualified, education-related expenses. Books, room and board, tuition, and other fees are examples of justifiable use. If beneficiaries fail to follow the guidelines for qualified withdrawals, their tax deductions are revoked and they may have to pay a penalty.
Even with tuition expenses, there are specific rules. The beneficiary can only use their 529 money to pay for education at eligible institutions, such as graduate schools, trade schools, or colleges that are fully accredited.
Should I Include My 529 Account in My Estate Plan?
Once you set up your educational investment plan or 529 plan, talk to your estate planning attorney about it. Your lawyer can help you find a convenient way to include the new account in your current estate plan, ensuring that the funds will continue to serve their intended purpose— providing quality education for someone you love.