A 529 plan is a state-sponsored plan designed to help people save for higher education. There are two types of 529 plans: pre-paid tuition plans and college savings plans. Pre-paid tuition plans allow savers to purchase units or credits at various colleges and universities for future tuition. These plans generally cover tuition and mandatory fees only, however, a few plans may allow an add-on for room and board. Under this plan, there may be an age or grade requirement. In addition, there may be a resident of the state requirement for either the student or the owner of the account.
A college savings plan is a trust set up for the benefit of another for the use of higher education. The person designated to receive the benefits is called the “Beneficiary.” The owner of the account is called the “Custodian.” The college savings plan covers all qualified higher education expenses including room & board and books and computers (if required). The participant must be of age of majority, however, there is no age limit for the beneficiary.
These funds must be used for post high school education which can include trade schools, community colleges and universities (public and private). If the funds are not used for education by the initial beneficiary, the named beneficiary can be changed. This can be changed to any family member; sibling, parent, grandparent or even the beneficiary’s child. Subsequent changes can be to a non-relative
An investor should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. More information is available in the issuer's official statement which can be obtained from your financial professional. The official statement should be read carefully before investing.
- Plan contributions grow tax-deferred
- If used properly for qualified educational expenses the appreciation of the assets can be used as income tax-free.
- States may offer their own tax benefits
- The account is treated as a parental asset for financial aid purposes
- Distributions are counted as parent or student income.
- These funds are designed to be used for higher education. Therefore, funds used for non-educational use or educational expenses K – 12 are subject to taxes and penalties.
The investments inside a 529 plan may fluctuate with changes in market conditions. When redeemed shares may be worth more or less than their original value.
Non-qualified withdrawals do not enjoy tax-favored treatment. The earnings part of a nonqualified withdrawal will be subject to federal income tax and 10 percent federal penalty. State penalties are also possible. Any tax considerations regarding 529 plans should be discussed with a qualified professional before investing.