Overview of 529 Plans

What is a 529 Plan?

Named after Section 529 of the Internal Revenue Service (IRS) code, a 529 plan, also known as a Qualified Tuition Program (QTP), is a method of prepaying for or contributing towards an account established for the purpose of financing a student’s future higher education expenses. 529s allow you to take your invested funds and allocate them among stocks, bonds, money market or mutual funds, and are usually not subject to federal taxes as long as they are used towards Qualified Higher Education Expenses (QHEEs).

There are two types of 529 Plans: Prepaid Tuition Programs and College Savings Programs. The major difference between the two is that the former allows you to lock in today’s tuition rates by prepaying for tuition “units” or “credit.” The latter invests your contributions into a preselected portfolio of stocks and bonds, which guarantees no lock on tuition rates. It is subject to market conditions, and generally has a higher Return On Investment (ROI) than a prepaid plan. Compare the two here.

Who qualifies or should invest?

Anyone, regardless of their income or relation to the “beneficiary” (student receiving the 529 funds), may contribute to a 529 Plan. He or she must be a U.S. resident of at least 18 years or older and have a social security or tax ID number. It is important to note that 529s are not limited to children; adults can also use these programs to save for their own qualified higher education expenses. Is a 529 Plan Right for Me?

The typical 529 plan investor:

  • Expects his or her children to enroll in a post-secondary institution, including community colleges, private colleges or universities
  • Lives in a state that offers full or partial state-income tax deductions for contributions towards a qualified 529 plan (contact your State Treasury to determine which 529 plans are qualified). See 529 Plans by State 
  • Earns enough income to be ineligible for a Coverdell ESA
  • Is starting to plan for their children’s higher education career late in their lives
  • Is interested in saving large sums of money on higher education
  • Would like to fund a loved one’s higher education expenses while saving on estate planning
  • Has a beneficiary who is unlikely to qualify for need-based financial aid
  • Lives in a high-tax state with significant 529 tax breaks

How much can you contribute?

Federal law states that contribution amounts cannot be greater than those required to fund the beneficiary’s QHEEs. While federal law sets no contribution limit, each state does. State limits for College Savings Plans typically range between $146,000 and $305,000 with a median limit of $235,000. For prepaid plans, they usually range between $50,000 and $100,000. Bear in mind that any excess of the state contribution limit is subject to state, and in some cases, federal income tax.

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