529 plans are accounts designed to help families save for the future college expenses of young family members. A 529 Plan is designed to help you save money now to pay your child’s college expenses later.
Investment companies who design a plan, which looks similar to a retail mutual fund account or IRA, will partner with state governments to offer the state’s official 529 plan. Families can invest in a 529 and gain access to an array of mutual funds.
People are free to use the 529 plan for other states, but they are likely only going to be able to take a state tax deduction (up to $5,000) for contributions made within their state of residence. There is no Federal deduction for 529 contributions, but the entire account balance can be used tax-free if the funds are used for qualifying educational expenses.
Also, an account can be repositioned for use by another family member if there is enough to go around. Income taxes and a 10% penalty will be assessed if the funds are used for anything other than qualifying education expenses. 529 plans have higher contribution limits than other educational savings accounts, such as the outdated Coverdell ESA.
Some families choose to use a UGMA/UTMA account in a child’s name for educational purposes, because these accounts also receive a favorable tax treatment, and there is no penalty if the funds are not used for college. The UTMA account becomes the property of the young person at the age of majority, however, which differs from state to state.
Some states and educational institutions may also offer tuition prepayment programs, which guarantee a certain amount is available in the future, based on the contribution amount. Prepayment programs are also considered 529 plans. The 10% penalty on 529s is
waived if the child receives a scholarship.
What is the Federal Supplemental Education Opportunity Grant?
How Can I Use the Money From My 529 Plan?
Will Having a 529 Plan for My Child Impact His/Her Eligibility For Financial Aid in the Future?
What are the Contribution Limits For My 529 Plan?
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