What Is a 529 Plan?

With the cost of attending college continuing to skyrocket, consider investing in a 529 college savings plan to help fund your child’s higher education goals.

History of the 529 Plan

529 plans are college saving accounts that are exempt from federal taxation. They were introduced in 1996 as a way for Americans to save money for qualified tuition programs. The program has grown to include expenses associated with higher education, such as books and computers, and they can be used to fund K-12 tuition, up to $10,000 a year according to US News.

Prepaid Versus Savings Plans

There are two types of 529 plans — higher education saving plans and prepaid plans that cover tuition. Prepaid tuition plans allow plan owners to lock in the current cost of tuition to protect against the soaring costs of higher education. These plans have decreased in popularity for a variety of reasons. For example, the plan only covers the cost of tuition. Room, board and other expenses are not included. State-run prepaid plans can only be applied to in-state colleges and universities, thus limiting the higher education options. The college savings investment plan works like retirement plans or Roth IRAs by investing your after-tax contributions in various fund families. The 529 college savings plan offers a variety of investment options to choose from. The 529 plan account value will fluctuate, based on the performance of the investment options you’ve chosen.

Where You Can Use a 529 Plan

Almost every state has a 529 plan. You can choose to invest in any state’s 529 plan, not just in the state where you reside. You can use your 529 plan at more than 6,000 colleges and universities in the United States according to savingforcollege.com. A simple internet search will tell you whether your college accepts 529 plans for payment. In most plans, your choice of college is not impacted by the state that sponsors your 529 plan. You can be a resident of Pennsylvania, invest in Virginia’s 529 plan, and go to college in California.

The Best 529 Plan for You

You’ll need to research plans for yourself to see which offers the most benefit to your family. Compare tax deductions, fees and expenses to find out if your state plans are fairly priced. College 529 policies vary from state to state, but they follow the same basic guidelines for the most part.

Unused Money in a 529 Plan

If your child chooses not to go to college, or gets a scholarship which covers all expenses, you don’t have to worry about losing the money you’ve stocked away. To avoid paying taxes and penalties, you could change the beneficiary of the plan to another family member (a younger sibling, perhaps). Other options are to keep the funds in the account, should you child decide to go to graduate school, or make yourself the beneficiary so that you can further your own education.