Always a procrastinator, you’ve decided to break the cycle and start saving for your child’s college education early. You’ve come to the conclusion that a 529 plan is your best investment alternative. If you can relate to this scenario, you need to brush up on some important rules of 529 plans before opening an account for your future college graduate. The following 4 types of rules are particularly important.
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529 Plans by State
529 plans are usually controlled by state governments. Two types of plans exist, prepaid tuition plans and college savings plans. Prepaid tuition plans provide parents the opportunity to purchase credits at a specified college or university for future expenses. College savings plans allow parents to contribute money into an investment account for future post-secondary educational costs. Prepaid tuition plans require you to reside in the state where you purchase a plan. College savings plans do not force you to set up an account in the state where you live. -
Contribution Limits
Depending on the type of plan you choose, contribution limits may differ. Usually, contribution limits on prepaid tuition plans are more stringent than college savings plans. If you choose a college savings plan, you will probably be able to invest over $200,000 in total. With either type of 529 plan, you are not limited by the amount of annual income you make. Regardless of whether you are a teacher earning $40,000 a year or a chief executive officer making $1,000,000 a year, you can normally invest as much or as little in a 529 plan as you like. -
Withdrawal Rules
529 plans can only be used to cover qualified educational expenses. Both types of 529 plans consider tuition and mandatory fees as qualified educational expenses. Mandatory fees might include athletic fees and healthcare fees, but would exclude fraternity dues and honor society fees. College savings plans also allow money to be used for books, computers, and room and board. If you withdraw the money in your account for other purposes, you will suffer a penalty. In addition to paying income taxes on accumulated income, you will incur a 10% fine. -
Age Restrictions
Prepaid tuition plans have age restrictions. You can only utilize this type of plan if its beneficiary is currently a certain age or enrolled in a specific grade in school. Fortunately, college savings plans don’t have age limitations. You can even open one for yourself or another adult.
When saving for their kids’ future college expenses, many families opt to invest in 529 plans. However, as with any other type of investment, you shouldn’t enter into this venture lightly. Before opening a 529 plan, do your homework by learning about important rules of these investment vehicles. With your child’s future at stake, the time spent on researching different plans will be worth it.
