What is a 529 Savings Account?

Parents or grandparents often set up these accounts, and the student is the designated beneficiary of the plan. Students can set them up for themselves as well. Virtually anyone could start an account and then name another person as the recipient; the beneficiary does not have to be a family member. You also have no limit on the number of plans that you can create.

Advantages of a 529 Savings Account

Regular savings accounts are taxed on their interest income. Earnings on a 529 savings account are generally not taxed at all—at both the state and federal levels. However, the money must be specifically used for education expenses to qualify for this tax advantage. Qualifying educational expenses include more than just tuition; they can also cover required costs or fees, books, and room and board.

The contributions that donors make are not tax deductible at the federal level. Some states may offer deductions for contribution.

There are certain contribution limits as well. Payments cannot be more than the expected educational expenses of the beneficiary. You should also keep in mind that contributions are subject to a gift tax if the contribution is over $14,000 (including other gifts). Individual states may also have limits on contributions.

529 savings plans may affect need-based financial aid if the student or the parent owns the savings plan.

Types of 529 Savings Plans

There are two general types of 529 savings accounts. The first is a prepaid tuition plan. In this plan, you have picked a school already and you are essentially locking in a specific tuition rate before you or the beneficiary attends that school. With the rising costs of education, this can be a huge benefit.

Only specific schools allow you to use this type of plan, and the beneficiary often has to be an in-state resident to take advantage of it. Individual schools are not permitted to offer savings account plans.

The other type of plan is a simple savings plan. This plan can be used anywhere, but it does not guarantee any tuition rates like a prepaid tuition plan does. The funds must still be used for qualified education expenses.

Almost every state has an option for 529 savings plans, and some have more than one option. You can speak directly with the plan manager or with a financial advisor to set up a 529 savings plan. Keep in mind that an advisor could charge a fee, so it may be better to set it up on your own. Individual schools may offer information about plans as well.


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