A Quick Guide to 529 Plans

May 29, 2020 12:00:00 PM

There are lots of options to save up for tuition costs, whether you’re saving for yourself or someone else. The 529 plans, known as state qualified tuition plans, are a great way of saving for college. The 529 plans are state sponsored and are authorized by Section 529 of the Internal Revenue Code. One great benefit is that the growth is not subject to federal tax and are often also exempt from state tax, as long as you use the funds for eligible college expenses. Many states offer benefits for investing in these types of plans, such as matching grants, although these benefits can vary from state to state.

Want to learn more about 529 plans? Check out this video from GreenPath’s financial wellness experts, and keep reading for a closer look at the two types of 529 plans – Prepaid Tuition Plans and Education Savings Plans.

What is a Prepaid Tuition Plan?

A prepaid tuition plan allows the account holder or saver to purchase specific credits or units at participating universities or colleges for a beneficiary. Sometimes prepaid tuition plans can be used for room and board, however most of the time they can only be used for tuition fees and mandatory costs.

What are the benefits of using a Prepaid Tuition Plan?

A Prepaid Tuition Plan locks in the price of tuition at eligible public and private colleges and universities. The Private College 529 Plan is a separate prepaid plan specifically for private colleges and can be used to cover the cost at 250 private institutions. Most prepaid plans allow the beneficiary to have a lump sum or installment payments based on the age of the beneficiary and the number of years of tuition. Some state governments guarantee any funding put into a prepaid tuition plan, which ensures your money is protected. However, make sure to check the details of your plan as some aren’t state sponsored, meaning your money could be at risk if the sponsor comes into financial difficulty.

What are the restrictions of a Prepaid Tuition Plan?

Often, prepaid plans require the contributor to the plan (whether that’s a parent, guardian or the student themselves) to be a state resident – so this is something to consider when looking at different options. While there are converted options for out-of-state programs, this can vary depending on the specific plan. Prepaid plans also often have an age limit as well as a limited enrollment period.

What is an Education Savings Plan?

Education Savings Plans are generally established to help a parent set up an account for their child with the idea of paying applicable college expenses. These types of plan have a variety of investment options that can be designed to shift towards more low risk investments as the beneficiary gets closer to college age.

What are the advantages of using an Education Savings Plan?

Education Savings Plans are more flexible and can generally be used at any college or university; they are not restricted by the state or resident of the saver or beneficiary. There’s also no age restrictions and enrollment can take place year-round. Funds in an Education Savings Plan can be used for any higher education expenses (stipulated within the plan), which could include but are not limited to tuition, accommodation and books. This type of plan can be used to help with the cost of elementary and secondary schools, as well as colleges or universities.

Are there any disadvantages to an Education Savings Plan?

Unfortunately, an Education Savings Plan doesn’t allow for college tuition costs to be locked-in at a certain price. They also tend to have a contribution limit of $200,000, so depending on your education savings goals, this is an important factor to keep in mind. In addition, Education Savings Plans offer no state guarantee, meaning investment options are subject to market risk and therefore may increase or decrease in value over time.

Final Questions: What if I don’t use all the funds in my 529 plan?

Some people worry that they might not end up using all the funds they put in their 529 account. Perhaps their child decides not to go to college or gets offered a scholarship; or other financial needs arise, and there is a desire to access the funds. If that happens, there are ways to repurpose money that’s been saved into a 529 account. You can choose to keep the same beneficiary in case they decide to go to grad school, or you can change the beneficiary to another qualifying family member. You could also make yourself the beneficiary to further your own education later down the line. If funds placed in a 529 account are used in a way that isn’t stipulated in your plan, you might be subject to taxes or penalties on those earnings. So, if you aren’t able to use your 529 account as originally planned, make sure to check your options.

Tags: Student Finances, Savings