A 529 plan is a way to save for college expenses for a selected individual (usually a child or a grandchild. Depending on the state, there are specific tax benefits or advantages to having your money in this account versus a basic savings accounts.
There are two types of 529 plans, a 529 Savings Plan and a 529 Prepaid Plan.
- Books, supplies and equipment for classes
- Fees (technology, etc)
- Room and board (as long as the student is at least half time)
529 Savings Plan
- The money is usually in mutual funds
- As the beneficiary gets older, the owner may choose to be less risky with the mutual funds.
- States run these plans.
- Records are kept by mutual fund companies.
529 Prepaid Plans
- The purchaser buys a credit at the current price, and that money invested will still be worth a credit when the beneficiary enters college.
- States or colleges can offer prepaid plans.
- Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Texas, and Virginia are open to new enrollment in prepaid plans at this time.
Advantages of the 529 Programs
- There are several states that offer tax deductions from 529 plans.
- The principle is able to grow tax free.
- The purchaser is the owner of the account, and may use/disperse the funds as they wish.
- Fees are low
- Easy to enroll, and automatic deductions are available
Disadvantages of 529 Programs
- There are several 529 programs to choose from, not all are investments for higher education which creates some confusion.
- Should you choose not to use the money for college, the money will be taxed at the current rate, plus an additional 10%.
- A student may not qualify for as much financial aid if their tuition is payed directly from a 529 account.
Each state offers their own version of 529 plans, and some will transfer between the states. It is very important to check the laws in your state to determine eligibility and specific rules that will apply to you.