Plenty of my peers are getting married and having children, and one of their biggest concerns is being able to save for college for their kids while paying off their own massive student loan debts. Believe it or not, there is a very easy way to get saving for your kids without breaking your own bank.
For this edition of Macro Mondays, we will be discussing the basics of 529 Savings Plans to help save for education expenses. As always, for more information be sure to check out Investopedia and always consult a professional before diving headfirst into any new accounts.
What is a '529 Savings Plan'?
A 529 Savings Plan is a tax-advantaged method of saving for future college expenses that is authorized by Section 529 of the Internal Revenue Code. The plan allows an account holder to establish a college savings account for a beneficiary and use the money to pay for tuition, room and board, mandatory fees and required books and computers. The money contributed to the account can be invested in stock or bond mutual funds or in money market funds, and the earnings are not subject to federal tax (or state tax, in most cases) as long as the money is used only for qualified college expenses. The plans are open to both adults and children.
States have their own 529 savings plans with unique features. An individual can open a 529 plan in any state, and the plan does not have to be in the account holder's or beneficiary's state of residence.
How much can I contribute to a '529 Plan'?
The maximum amount you can contribute to a 529 depends on the state: In general, the total amount contributed can be no more than the beneficiary’s eligible education expenses. As far as annual contributions, they are treated as gifts, so contributions up to $14,000 each year (current for tax year 2017) can be made without triggering the federal gift tax. You can also make a lump sum contribution that covers five years’ worth of contributions, giving a total of $70,000, or $140,000 for married couples – provided you don’t make any other gifts to that beneficiary during the five-year period.
Are there different kinds of '529 Plans'?
Yup, there are two different kinds actually...
529 savings plans: These are similar to some other investment plans in that your contributions are held in mutual funds and other investment products. Account earnings are determined by the performance of the underlying investments, and most plans offer an age-based investment approach that gradually becomes less risky as your beneficiary nears college age, so you’ll have a higher concentration of stocks in the beginning, gradually shifting to more cash and bonds over time. You can also choose a static approach, where the investment fund or group of funds keeps the same allocations.
529 prepaid tuition plans: Prepaid tuition plans (or guaranteed savings plans) let you lock in today’s rates by pre-purchasing tuition. The program pays out at the future cost to any of the state's eligible institutions – a good deal considering the rising costs of college. If the beneficiary ends up going to an out-of-state or private school, you can transfer the value of the account or get a refund. These plans can be administered by the state and higher education institutions.
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