Before deciding to save for college, it's important to look at your overall finances, including other goals like buying a home, saving for retirement, or paying off high-interest credit card bills.
A 529 plan is a common way to save for college, but it's not the only tax-friendly way to do so. There are also Coverdell accounts, UGMA/UTMA accounts, tax-exempt securities, savings bonds, and accounts that pay taxes.
Each of these has its own pros and cons and could affect your ability to get financial aid, so it's important to think about all of your options and get advice from a tax or financial expert.
When saving for college, keep in mind that using 529 funds for things other than college could lead to penalties or the loss of benefits.
So, it's important to carefully consider all of your options for saving for college, keeping in mind your overall financial situation and your long-term financial goals.
Talking to a financial or tax expert can help you figure out the best way to handle your particular situation.
Understanding The Rules Of 529 Plans
A 529 account can be opened by anyone. Almost anyone can put money into a 529 for a child, no matter how much money they have. This includes parents, grandparents, and kind friends.
You have to live in the state that has the plan for you to be able to get a tax break on your contribution. (Some states only let the person who opens the account deduct the money.)
You can also open multiple accounts for the same child in the same state. 529s can also be used by adults who want to go back to college, though some states have age limits. In many states, you can even open an account in your own name.
"Qualified" withdrawals can be used to pay for most college costs. You can use 529 money to pay for tuition, fees, books, and supplies at any accredited, degree-granting college in the country, whether it's public or private, undergraduate or graduate.
As long as the student is enrolled at least half-time, you can usually use the money for room and board. If your child has special needs, you can use money from a 529 to pay for tutoring or special equipment.
You can change funds or switch to a different 529 plan. According to IRS rules, you can move investments around within a plan, but you can only do this once a year. (This is one reason why age-based funds, which automatically change how the money is invested, are so popular.)
Your money can also be moved to a new plan once a year. Some programmes may charge a fee, and a few have a minimum holding period. For example, in New Mexico, rollovers have to wait a year before they can happen.
Also, some states, like Colorado and Nebraska, tax rollovers to 529 plans in other states to get back the tax breaks you've already gotten.
You won't lose the money if your child doesn't go to college or doesn't need it. You can get a full refund, but you'll have to pay taxes on your investment earnings as well as a 10% penalty.
If your child gets sick or dies, the plan will let you off the hook. If your child gets a scholarship, there won't be any fees for withdrawals up to the amount of the scholarship.
You could also leave the money in the account for as long as the state lets you. Maybe your child will go to college or graduate school in the future.
You can change the plan beneficiary as long as you choose a "family member." This means you could pay for a sibling, step-sibling, cousin, or aunt's college tuition.
Before you put money into a 529 plan, you should think about these 7 things.
If you know the answers to these questions, you might be able to choose the best 529 plan for you. Is the plan offered directly by the state or by the company that created it?
• What fees does the plan charge? How much of the money I invest goes to pay my broker? How does the plan decide when to waive or reduce certain fees?
• What are the limits on taking money out of the plan? What kinds of college costs does the plan cover? How many colleges and universities are involved?
• What kinds of ways to invest does the plan offer? How long do contributions stay in a fund before they are put to work?
• Does the plan have any extra benefits for people who live in the state? Should I put my money in the plan for my state or in another plan? Does my state's plan give tax breaks or other benefits to people who invest in it? If my state's plan costs more than another state's plan, do the tax breaks or other benefits my state offers make it worth it to invest in the cheaper plan from another state?
• What are the limits of the plan? When can an account holder change the way the account is invested, change the people who get money from the account, or give the account to another account holder?
• Who is in charge of the project? When does the current management contract for the programme manager end? How well did the plan work before?
