The creation of the 529 plans aimed to address the increasing costs of education and provide families with a dedicated savings vehicle to prepare for future educational expenses. Over the years, the 529 plans have become a popular choice for many families looking to save for higher education, offering tax advantages, investment options, and flexibility in managing the funds. But what is the 529 plan and how does it work?

A 529 plan is a tax-advantaged savings plan designed to encourage individuals to save for future education expenses. It is named after Section 529 of the Internal Revenue Code, which governs these types of plans in the United States. These plans are operated by states or educational institutions and offer various investment options to help grow your savings over time.

What is the Purpose of the 529 Plan?

The primary purpose of a 529 plan is to save for qualified higher education expenses, such as tuition, fees, books, supplies, and room and board. The funds can be used at eligible colleges, universities, vocational schools, and certain K-12 schools. Additionally, recent changes to the tax law allow for the limited use of 529 plan funds to cover student loan repayments or apprenticeship programs.

Contributions to the 529 plan is practically like a gift. When you receive money or if someone puts money into that account for you, it is non-taxable. Imagine putting in a few thousand dollars away for your childs education and watching that money grow knowing the 529 plan allows those funds to grow tax free as long as they are used on qualifying educational expenses.

How Can the 529 Plan Help?

The creation of 529 plans aimed to address the increasing costs of education and provide families with a dedicated savings vehicle to prepare for future educational expenses. Over the years, 529 plans have become a popular choice for many families looking to save for higher education, offering tax advantages, investment options, and flexibility in managing the funds.

What are the Different Kinds of 529 Plans?

When considering a 529 plan, it’s crucial to research the details, fees, investment options, and any potential tax advantages or state-specific benefits associated with each plan. There are two main types of 529 plans: prepaid tuition plans and education savings plans. 

The 529 Prepaid Tuition Plans: 

These plans allow you to prepay future tuition costs at participating colleges or universities at today’s prices. Essentially, you purchase education credits or units, which can be used to cover tuition and, in some cases, mandatory fees. Prepaid tuition plans typically have residency requirements, meaning they may be limited to residents of the state offering the plan. They may also have restrictions on eligible educational institutions.

The 529 Education Savings Plans:

Education savings plans, also known as college savings plans, are investment accounts that offer a range of investment options to help grow your savings over time. These plans are more flexible than prepaid tuition plans. Contributions are made with after-tax dollars, but any earnings on the investments grow tax-free, and withdrawals for qualified education expenses are also tax-free. Education savings plans are not limited to a specific list of institutions, so you can use the funds at most accredited colleges, universities, vocational schools, and certain K-12 schools.

What are the Changes Made in the 529 Plan?

There have been some recent changes in the 529 Plan. One of the biggest change is vital for children that are looking for funding from the Free Application for Federal Student Aid (FAFSA). FAFSA is a federal program that funds children’s education if they cannot afford it. 

In the past, if you had a 529 Plan you have to report it to your school. You need to declare the amount you have and inform FAFSA that it is what you have to potentially use for college. FAFSA will then look at your records and will provide you with less than the amount declared. They will place a cap on the amount otherwise you can just take it.

Today, while that is still the case, it is a bit different. Let’s say your grandparents started your plan, it could grow however high it needs to grow. When you apply for FAFSA to get aid from the government, there is no need to report how much money your grandparents put in your 529 plan.

What is the Difference Between Parent versus Grandparent Contributions?

For children and parent contributions those amounts must still be reported on the  FASFA however grandparent and other contributions amount do not. This is a huge change since people can now access FAFSA funding if necessary.

What Does the 529 Plan Cover?

A 529 plan covers a range of qualified education expenses related to higher education like tuition and fees, room and board, books and supplies, computers, internet access, and special needs expenses like tutoring and educational therapies. This means you can use the funds without any tax implications. If you use the funds for things not qualified for educational purposes you have to pay taxes for them.

If you want to use the funding for room and board you have to occupy the living space at least half the time to qualify as an educational expense.

Can You Use the 529 Plan for Other Educational Purposes Aside from College?

The short answer to this question is yes. If you decide to go to a private school on a K-12 level, you can use your 529 plan. You can start using $10,000 per year to pay for tuition. However, this may vary in different states. It is best to verify with your state to know how this process works or if this is an option.

What Happens When There are Still Leftover Funds on Your 529 Plan?

You can use all your 529 Plan if you still have funds in it to pay off college debt among other things. You can also change the plan name to your sibling or someone else that would be able to utilize the funding.

By 2024, they will allow people to roll their 529 Plan funds into a tax-free Roth IRA. If you have up to $35,000 in an 529 Plan, you can roll it over to a Roth IRA when you’re ready. Over the next 40 years, that amount will continue to grow tax-free which can total to millions thanks to compounding interest.