529 Plan Basics – Saving for Your Child’s Education

College might seem a ways away for your child but it’ll be here before you know it. You want to be ready to support your child through college and one great way to do that is through a 529 plan. In this post, I’ll be going over 529 plan basics including what it is, the different types of plans, and how a plan could impact your finances.

What is a 529 plan?

A 529 plan is a tax-advantaged savings account dedicated to cover the costs of further education. This means that the money accumulated in a 529 plan can be used completely tax free upon withdrawal. Anyone can open and fund a 529 account for a beneficiary including family, friends, or other relatives.

Each state has variations of their own 529 plans and over 30 states currently offer full or partial tax deduction or credit for 529 contributions. While you can open 529 plans for any state, it’s highly recommended that you open a 529 plan for your own state first before you open one for another state. This is because of the tax benefits you can receive from your home state.

Every 529 account is its own investment account. Contributions will grow and your plan will gain in value. This increase in value can be used and withdrawn at any time, whether it has been invested for 6 months or 18 years.

Prepaid Tuition vs. Education Savings

There are currently two types of 529 plans, the prepaid tuition plan and the education savings plan. Prepaid tuition plans are only offered by select states while every state offers their own variation of an education savings plan.

Prepaid Tuition Plan

A prepaid tuition plan allows you to buy units for a particular university at the current rate for the future rate of the beneficiary. This is usually for public, in-state universities. Currently only 9 states support prepaid tuition plans. 

• Florida – Florida Prepaid College Plan
• Maryland – Maryland529
• Massachusetts – Massachusetts U. Plan
• Michigan – SET with MET
• Mississippi – Mississippi Prepaid Affordable College Tuition Plan
• Nevada – Nevada Prepaid Tuition Program
• Pennsylvania – PA 529 Guaranteed Savings Plan
• Texas – Texas Guaranteed Tuition Plan
• Washington – Washington Guaranteed Education Tuition

Prepaid tuition plans allow you to pay today’s rates for future tuition units. You can pay this in two different ways: by units or by contract.

Prepaid Units

Plan participants can elect to purchase a certain number of units each year. Each year, the price of a single unit changes according to current tuition rates. A certain number of units will cover the tuition cost for any given year. For example, if 100 units cover’s one year of college and you buy 100 units at today’s rate, the same 100 units will cover one year of college many years later when your child is ready to go to college.

Contracts

Prepaid tuition plans generally have mandated regular contributions based on the particular contract. For example, a plan may guarantee that paying for three years of college today will cover two years of college in the future. 

Education Savings Plan

Education savings plans are similar to 401k’s in the fact that you choose the investment funds you want to grow your money with. Unlike prepaid tuition plans, education savings plans have no guarantees and simply grow with the trends of the market. 

Qualified and non-qualified distributions

The distributions of a 529 plan can be used for various purposes. In order to pay no tax on the withdrawals, you must withdraw using a qualified distribution. Non-qualified distributions will have a penalty of 10% on earnings and possibly more according to your state’s tax laws.

The 529 plan was originally initiated to support college education but has since been expanded to cover K-12 and apprenticeship programs. You can use up to $10,000 per year in your 529 plan to cover K-12 expenses. 

Qualified Distributions	Tuition and feesBooks and supplies (for college)Computer and internet access (for college)
Non-qualified Distributions	Extracurricular activitiesAny withdrawal which is not a qualified distribution

You can get the 10% non-qualified distribution fee waived in only the following scenarios:

• Your child dies or becomes disabled.
• Your child attends the U.S. Military Academy.
• Your child receives a tax-free scholarship.
• Your child receives tuition benefits through a qualified employer program.
• The qualified education expense was used to generate the American Opportunity Tax Credit or Lifetime Learning Tax Credit.

How do I start a 529 plan?

To start a 529 plan, you’ll need to sign up with a qualifying broker. Most brokers should be able to give the 529 plan basics for your specific state. There is no limit to how many 529 accounts you can set up. There is also no limit to who can open a plan for a beneficiary. 

When opening a 529 plan account, you will need personal information about the account owner and beneficiary. Typically, only one parent can be a 529 plan owner but many people can contribute to it. You will also need a minimum balance, which varies by state. Finally, if you chose an education savings plan, you will need to choose the investment funds you would like to invest in.

How does a 529 plan impact my finances?

If you have a 529 plan, colleges may see that you have enough funds to support your education. This may lead to the ineligibility of financial aid. 

529 plans also may have maintenance fees and application fees, so make you sure you read the fine print before enrolling in one.

Conclusion

Now that you know the 529 plan basics, you can determine if one is right for you. The sooner you start saving for a 529 plan, the better. You’ll be able to take advantage of cheaper tuition rates and compound interest, which will save you tons of money when your child goes off to college. Your wallet and your child will thank you!