A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, named after Section 529 of the Internal Revenue Code, are sponsored by states, state agencies, or educational institutions and are managed by investment companies.
Contributions to a 529 plan are not deductible on federal income taxes, but they may be tax-deductible on state income taxes depending on the state in which you reside. Withdrawals from a 529 plan are taxed as capital gains, and if used for qualified education expenses, they are not subject to federal or state income taxes.
Qualified Education Expenses Include:
-Tuition and fees required for enrollment or attendance at an eligible educational institution
-Room and board for students enrolled at least half-time
-Books, supplies, and equipment required for enrollment or attendance
-Certain expenses for special needs students
There are two types of 529 plans: prepaid tuition plans and savings plans.
Prepaid Tuition Plans:
Prepaid tuition plans allow you to purchase units or credits at participating colleges and universities at today’s prices. The value of the units or credits is based on the current tuition rates, and when your child is ready to attend college, the units or credits can be used to cover all or part of the tuition costs.
Savings Plans:
Savings plans are similar to a 401(k) or other investment account. You open an account and make contributions, which are then invested in a portfolio of stocks, bonds, or other securities. The value of the account will fluctuate based on the performance of the underlying investments. When it’s time to withdraw money for college, you can take out as much as you need, up to the amount of qualified expenses.
There are several different ways to finance education costs, and a 529 plan may or may not be the best option for you. Be sure to compare all available options before making a decision.