With annual tuition at U.S. public universities averaging nearly $9,500, saving money for a child’s college education may seem daunting. But even small amounts saved regularly will help, and over time will add up. One of the best tools for saving for college is a 529 Plan. These federally established college investment accounts provide a place for parents to invest for their children’s future educations and when needed for tuition and other education-related expenses, the money can be withdrawn tax free.
Most 529 Plans are administered by states and a common misconception is the belief that the account holder (generally the parent) must be a participant in the 529 Plan administered by their home state. In fact, any state plan can be selected and money withdrawn tax-free to pay for any education-related expense regardless of college location, or residence of the account holder or student. If the account owner chooses to do so, the name of the beneficiary (normally the child) can be changed to another person. An added benefit with 529 plans is that, unlike most savings accounts, the account owner maintains control when the beneficiary reaches legal adult age.
Another common misconception is that if the child doesn’t go to college, the money will be forfeited. In fact, the 529 account can be re-assigned to another beneficiary, even a parent who might want to further their own education.
If no one can use the funds for education, the money can be withdrawn. Although a tax penalty will likely be applied in this case.
Not all 529 Plans are created equal. Your dollars will be invested in a portfolio of mutual funds made up of stocks, bonds and cash-equivalent tools, and like all investments, some perform better than others. In addition, some plans are more complex than others, some are fee-laden, and some provide state-tax advantages.
The best 529 Pan for you will depend on your risk tolerance, your time horizon, and your state tax policies. Use online search tools from known and respected sources to research the various 529 Plans and visit their websites for direct and current details. Once you have narrowed your list down to two or three, download and examine the enrollment agreements. Check for fees, any minimum contribution amounts, and how you contribute. Contact each with any questions not answered online before you enroll.
For more information about 529 Plans visit the IRS Website(PDF), This IRS Publication(PDF), or This helpful article.
