What is meant by a 529 Plan?

 

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29 plan is a tax-deductible savings plan used to fund education. Originally limited to post-secondary education costs, it was expanded to include K-12 education in 2017 and apprenticeship programs in 2019. The two main types of 529 plans are savings plans and prepaid curriculum.

Savings plans are tax deferred and withdrawals are tax-free when used for qualifying education expenses. The pre-paid curriculum allows account holders to pre-pay tuition for specific colleges and to cover these costs at current prices. The 529 plan is also known as the Qualified Learning Program and Section 529 Plan.

 

 

 

 

 

Look at a glance

---529-Plan is a tax-deductible account that can cover educational expenses from kindergarten to graduate school.

---There are two basic types of 529 plans: savings plans and prepaid curriculum.

--- The 529 plan is run by the state and has different rules.

 

 

 

 

 

 

 

Realization of 529 plans

The 529 plan gets its name from Section 529 of the Federal Tax Code, but the plan itself is administered by the 50 states and the District of Columbia. Anyone can open a 529 account, but it is usually set up by a parent or grandparent on behalf of a child or grandchild who is the beneficiary of the account. In some states, the person who funds the account may receive a state tax credit for contributions.

Money in your account is tax-deductible until it is withdrawn. As defined by the IRS, these withdrawals are not subject to state or federal taxes as long as the money is used to pay for skilled education. For K-12 students, the tax-free withdrawal limit is $10,000 per year.

There is no limit on how much you can put into your 529 account each year, but many states have caps on the amount you can donate. These limits range from $235,000 to $525,000 more recently.

 

 

 

 

 

 

529 Plan Types

 

There are some important differences between the two main types of 529 plans, college savings plans and prepaid study plans.

 

Savings plan

Savings plans are the more common type. Depositors usually donate money to a plan that is invested in a selected mutual fund. Account holders can choose which fund to invest in, and the performance of that fund will determine how their account grows (or at worst shrinks) over time. Many 529 plans also offer target date funds that adjust their holdings over the years and become more conservative as beneficiaries approach college age.

In the 529 savings plan, withdrawals can be used for both college and K-12 expenses. For the 529 savings plan, eligible expenses include tuition, fees, room and board, and related expenses.

The 2019 federal law, the SECURE Act, added tax-exempt 529 withdrawals that include tuition enrolled in educational programs and student loan debt payments of up to $10,000 for both account beneficiaries and siblings.

 

Prepaid Curriculum

Prepaid curriculum is offered by a limited number of states and some higher education institutions. While the details vary, the general idea is that tuition can be locked at current prices for students who may not attend college for years to come. (Prepaid plans are not available for K-12 education.)

Like the 529 savings plan, the prepaid curriculum increases in value over time and eventually money withdrawn from your account to pay tuition is not taxable. Unlike savings plans, prepaid study plans do not guarantee accommodation and meals.

Prepaid Curriculum may have other limitations, such as: B. Available for certain universities. On the other hand, money in a savings plan is available at almost any accredited institution.

 

 

 

 

 

 

Tax Advantages of 529 Plans

 

The income in a 529 Plan is exempt from federal and state taxes when used to pay for technical training. Except under certain circumstances, such as death or disability, all other income is taxable and subject to a 10% penalty.

Contributions to the 529 plan are not tax-deductible for federal income tax purposes. However, more than 30 states offer tax credits or varying amounts of deductions for donations to 529 plans. In general, you should invest in your home country's plans.

 

 

 

 

 

Other Considerations

 

As with any form of investment it is better to start earlier. With the 529 Savings Plan, you can spend more time growing and growing your money. A prepaid curriculum allows you to set lower tuition as many schools increase their tuition each year.

If you have money left in the 529 plan (if the beneficiary gets a substantial scholarship or decides not to go to college), you have several options. One is to change the beneficiary of the account to another relative, as financial advisor Jay Murray explained in the box above. The other is to keep the current beneficiary in case you change your mind to go to college or study later. Worst case, you can always repay your account and pay taxes and a 10% penalty.