Sending a child to college requires a large monetary investment for which many parents are not prepared. Sure, there is the option of financial aid, but why should parents saddle themselves or their children with hefty student loan payments when there is an alternative. There is a savings plan designated specifically for higher education that will help parents fund their child’s educational dreams.
The Internal Revenue Service created the Section 529 plan in 1996. Section 529 plans are education savings plans set up by an educational institution or the state. Their purpose is to help families set aside money to fund college education for a designated beneficiary. Parents, grandparents, or other family members can set up a plan themselves or enlist the help of a financial advisor in order to do so.
The two types of 529 plans are savings plans and prepaid plans. Like a 401(k) or IRA, savings plans place contributions into mutual funds or other investments. The value of the account will then be subject to fluctuations in the market performance of the investments. Earnings will grow tax-deferred and distributions will be tax-free when they are used for qualified education costs at post-secondary institutions. Savings plans are not limited by state so a resident of Montana may use the money to attend college in Texas, if desired.
The prepaid plan allows the investor to pre-pay the costs of education at an in-state public college. These prepaid plans may also be converted to be used at a private in-state or an out-of-state college. If necessary, the beneficiary for either type of plan may be changed to another family member without any negative tax consequences.
The 529 savings plan is a great way to save for college tuition, fees, equipment, books, supplies, and room and board. Though contributions to a 529 plan are not deductible for federal income tax purposes, they may be deductible from state income taxes. Adults can even set up a Section 529 plan for themselves, anticipating that they may want to further their education in the future.