Introduction

529 plans are a way to save for college without paying taxes on the earnings. Anyone can open a 529 plan, and there are no income limits.

If you’re saving for your child’s college education, 529s can be an excellent way to earn tax-free investment growth.

What is a 529 plan?

It is a state-sponsored, tax-advantaged savings plan designed to encourage saving for future college expenses. It’s like an IRA account because you can invest it in stocks, bonds and mutual funds.

The main distinction is that the money you put into a 529 plan grows tax-free and can be withdrawn without penalty if used for qualified educational expenses at an eligible institution.

The plans are sponsored by the states or educational institutions themselves. Each state has its rules about contribution limits and investment options, so make sure you know what your 529 plan allows before opening one up!

You can contribute up to $7500 per year per beneficiary (typically your child). There are no age restrictions on who can receive distributions from their 529 savings accounts (anyone under 59 1/2 will be subject to income taxes).

While distributions made on behalf of others may be limited depending on the type of beneficiary designation (see below).

What does the term ‘529’ mean?

The term 529 comes from Section 529 of the Internal Revenue Code, which defines qualified tuition programs.

These include college savings plans and prepaid tuition plans. There are also K-12 savings plans that can be used for primary and secondary school expenses.

The Taxpayer Relief Act of 1997 amended Section 529 to include references to ABLE accounts. A 529 plan is similar to an ABLE account because it allows you to save money tax-free for your child’s future education expenses.

Unlike a regular 529 plan, you don’t have to use the funds just for college expenses. You can spend them on anything related to your child’s disability (such as medical bills).

Who determines where I can invest my 529 assets?

You’re the account owner, so you have complete control over where your 529 assets are invested. However, some states may restrict where you can invest your plan assets.

You should check with your state’s plan provider to see if they offer investments in other states’ plans and what those investment options are.

If you’re unsure which state to choose, consider that most plans allow investors to invest in other qualified investments such as mutual funds or stocks (as long as they meet certain criteria).

Can I cash out of my 529 plan without penalty?

You can withdraw money from your plan without penalty if you use the funds to pay for college expenses.

You can also withdraw money from your 529 plan without penalty if your child gets a scholarship (a qualified student withdrawal).

Finally (and most importantly), there are no penalties if your child decides not to attend college.

What if my child doesn’t have enough money in their 529 plan

If your child doesn’t have enough money in their 529 plan for school each year, you can take a loan or withdraw the money.

There is no financial limit in a plan that can be borrowed. You don’t have to pay back loans until after graduation from college.

If you need to borrow from your 529 plan:

• Open an account at one of the many banks that offer this option and request that it be opened as a “529 prepaid tuition” account (you’ll see the name of this type of account listed on our list).
• Complete an application form with your child’s name, address, social security number and birth date, so they know who they’re lending to while their local government office is still processing it. This could take up to two weeks, depending upon where they live, so please allow plenty of time before applying for loans when possible.

Do I have to use my child’s 529 savings only for college expenses?

You can use your savings plan to pay for other postsecondary education expenses. You may also be able to transfer the funds directly to another family member’s qualified tuition program account. This is known as a “tax-free rollover.”

Here are some of the other postsecondary education expenses that you can use your 529 savings for:

• Room and board at an eligible educational institution
• Books, supplies, equipment and uniforms required by an eligible educational institution
• Computers or peripheral equipment primarily used by students enrolled at an eligible educational institution

Can a child attend any college with funds from their 529 plan?

Yes, your child can attend any institution that participates in a U.S. Department of Education Title IV program, which includes state colleges and private and foreign institutions. Your child can also attend any institution eligible for federal student aid, including vocational schools, proprietary schools, and career schools.

Your child can attend any institution that participates in a U.S. Department of Education

529 plans are state-sponsored investment vehicles. If you’re unsure what that means, think back to your high school days and the “federal” vs “state” debate.

Most states have plans, which means that when you contribute to one of these accounts, you’re investing in your state’s economy instead of the United States economy as a whole.

You can pick from various investment options for your account (more on this later), but if you choose an option offered by your state government, it won’t be run by an external financial institution like:

Fidelity or Schwab; instead, it will be managed internally by the same agency with whom you opened the account itself. In other words, it will still be administered by government employees who work directly under public oversight rather than being outsourced into private industry hands (which some people believe could lead them towards mismanagement).

The exception here is New York City: since its population has exploded over recent years due to immigration from all around the world, including China, where almost everyone speaks some Mandarin, at least among their friends.

Many families there consider themselves bilingual, so much so that they’ve made Mandarin classes mandatory within the elementary school curriculum.

Conclusion

We hope this has answered some of your questions about 529 plans. If you want to learn more, we encourage you to contact a financial advisor or visit the National Association of College and University Business Officers website.