What is a 529 College Savings Plan?
A 529 college savings plan is a vehicle designed to allow taxpayers to save money for a college expenses on behalf of a designated beneficiary. Contributions and earnings grow on a tax-deferred basis, and the money is tax-free when withdrawn for qualified educational expenses.
Who is a 529 Plan for?
A 529 plan may be established by any taxpayer. This means a parent, friend, family member, or anyone else can open a 529 plan on behalf of the beneficiary. The beneficiary can even establish a 529 college plan for himself. The beneficiary may be changed after the account is established, as long as the new beneficiary is a qualified family member of the original beneficiary.
How it Works
Contributions made to a 529 college plan are made with tax qualified, or “pre-tax” money. The owner directs the contributions into an appropriate portfolio of investments, and the money will grow on a tax-deferred basis. The account value may be withdrawn without any tax consequences if it is used to pay for qualified educational expenses. If the money is used for unqualified expenses, it will be subject to income tax, as well as a possible 10% early withdrawal penalty.
Different types of plans
There are two basic types of 529 plans: prepaid tuition programs, and college savings plans. Prepaid tuition programs are usually offered by the state of an eligible school. These plans allow for the purchase in advance of credits for the plan’s beneficiary during enrollment periods established by the state. College savings plans can be established at any time, and they allow contributions to be made on behalf of the beneficiary.
If used properly, 529 college savings plans can provide a completely tax-free way to save for and pay for a person’s education. In addition to helping someone pay for school, the plan can benefit the plan owner by shielding a portion of their earnings from taxation.