529 College Savings Plan Overview

A 529 college savings plan allows a donor, not necessarily related to the beneficiary, to use after tax money, to save for the beneficiary’s college education. The money saved is allowed to grow tax deferred and the distributions, as long as they are used for the beneficiary’s education, can be distributed tax free.

In many cases the beneficiary can be changed and the donor retains control over the investment at all times. This is not like the Uniform Transfer To Minors accounts of the past, where the money was irrevocable and solely for the benefit of the minor. Should the beneficiary wish to opt out of the program, they can. The distributions they take will be taxable and there will be a 10% penalty. This program is not only a boon for parents and grandparents but also for the investor that has already surpassed their maximum allowable contributions to their IRA and Pension plans.

These are well designed and flexible plans, and the potential for investor abuse is certainly present. But aside from the possible negatives, the positive aspects of the plans for parents an relatives of the beneficiary are enormous. Anyone is eligible to contribute to the plan as long as they designate a beneficiary. Beneficiary’s can be any age. The amount contributed to the plan is limited by what would be a reasonable amount to provide education for the beneficiary. This is not as much a concern because most will keep their contributions below the gift tax limitations. This is because, even though the contributions are using after tax money, they can trigger a taxable event should they exceed the maximum allowable gift tax for that year. The beneficiary can only be changed to another member of the beneficiary’s family. This means that if you are saving for one child, and that child does not go to college or does not use all of the money, the plan can be switched to a sibling, child, or other relative of that original beneficiary, subject to a few restrictions.

Distributions can be made tax free as long as they are being used for the beneficiary’s education expense, and as long as they are made while the beneficiary is attending an allowed institution. The money in the 529 plan can affect the financial aid calculations for the beneficiary. But as of the writing of this, it would only affect that calculation if the donor is listed as the parent of the beneficiary. The current Federal financial aid applications do not ask about funds held for the beneficiary by individuals other than the parents.

What are the differences between pre paid tuition plans and college savings plan?

While there are dozens of companies that can handle and manage your 529 plans and hundreds of investment options available from each of these companies, there are only two primary types of 529 plans. The first is called the Prepaid tuition 529 plan and the other is called the 529 savings plan. You need to understand the differences in these plans before choosing one or the other. This guide will help you know the basics and assist you in choosing the type of plan that is best for you.

What fees and expenses will I pay if I invest in a 529 plan?

The fee structure of the 529 plan you choose is dependent on many factors, including the type of plan you choose and the investment options you select. The specific company you choose to place your 529 plan with can also be a factor in the overall fees and expenses you can expect. But overall, most fees and expenses are similar to those that you see with other managed tax deferred plans such as self directed pensions, self directed IRA’s, and managed 401K plans.

Advantages of a 529 College Savings Plan

The 529 plan has a long list of advantages that were not previously available to individuals that wanted to save for another persons college education. While the contributions are made with after tax funds, the tax deferred growth and tax free withdrawal options are powerful advantages. The fact that the beneficiary can be changed, and that the donor retains full control of the funds, is also an advantage over the old Uniform Transfer To Minors accounts. Read through the advantages and you will see that the 529 plan is a way to save and invest on a tax deferred basis, while still retaining full control of the investment. The donor can also withdraw from the program if necessary at any time and take back all of the contribution. Subject to a small penalty and income taxes on the investment gain within the plan.

Is my financial aid impacted if I invest in a 529 college savings plan?

The first question anyone college bound has when using a college savings plan, or any savings plan for that matter, is if it will affect their overall eligibility for financial aid. The answer to this is two fold. The first is dependent upon the specific institution that you will be attending. The second is dependent upon if the federal financial aid package application is ever changed to include a question about any 529 plans that are hed for you other than by your parents.

Is 529 Savings plan right for me?

This question needs to be answered after a bit of analysis of your specific financial situation. The 529 can be a powerful tool that can be used to help the beneficiary go to a school, or any school, that they otherwise may not have been able to afford. Reviewing these many questions and factors will help you decide if the 529 savings plan is right for you.

How to choose the best 529 college savings plan?

How do you choose which overall plan to start when selecting a 529 Plan? There are many questions and concerns that need to be addressed before choosing. Some of which will be unknown until the beneficiary is almost ready to attend college, and by then, saving for their education may be too late. Determining the right plan is important, but more important is actually starting a plan as soon as possible. The built in plan flexibility can help you sort things out later if need be.

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