College Planning Using a 529 Plan

Are you trying to save money for your child’s or grandchild’s college education? College is expensive and offering any type of help to your loved one will be appreciated. We’re going to be covering college planning using a 529 plan.

What is a College 529 Plan?

A 529 college savings account is a savings account that can be used for a child’s college education and supplies. The plan can be used as early as elementary school if you want the child to go to a private school and pay for it.

Why would you want to invest in a 529 plan?

The account’s earnings will grow tax-free with one caveat: funds in the account must go towards qualified expenses. Qualified expenses cover (for the most part):

  • Room
  • Board
  • Tuition
  • College 
  • Education-oriented expenses

You can withdraw funds out of the 529 plan, pay tuition, and enjoy significant tax-free benefits as a result.

Let’s assume that you want to save for a child being born today. You put $1,000 into the account, and by the time the child is eligible for college, this money is likely to double twice.

For example:

  • You deposit $1,000
  • The money doubles to $2,000
  • The money doubles to $4,000

Every 10 years, these accounts will double – in most cases. The growth in this account is tax-free. Plug in another figure, such as $10,000, and you’ll see that the account grows to $40,000 on its own in 20 years, even if you don’t add another penny into it.

The $30,000 growth is tax-free.

Of course, markets fluctuate, so you can earn more or less, depending on the market.

What Impact Does a 529 College Savings Account Have on Financial Aid Eligibility?

In terms of account ownership, the account is owned by the person who opened the 529 account, usually a parent or grandparent. It is the account opener’s money because they’re in complete control of the distributions from the account.

Children do not have control of the account, so they can’t spend the money on random expenses.

In terms of financial aid, a 529 account will have a minimal effect on the aid. The effect is:

  • Any amount past $10,000 (or close to it) lowers student aid packages
  • 5.64% of the asset value above $10,000 is reduced from an aid package

So, let’s assume that you had $100,000 in the account. In this case, $5,640 would be reduced from the financial aid package.

With the high, tax-free growth rate that some of these accounts achieve, it’s a worthwhile method to save for a person’s college tuition.

Which Investment Options Does a 529 Offer?

The person setting up the account, often a relative, will oversee the account’s investments. You can pick the investments yourself or opt into a lifecycle fund, which is a hands-off method where someone else invests for you.

Owners of the account are in total control of the account and any investments made on the account.

Common Myths and Questions Surrounding 529 College Savings Accounts

If I Don’t Use the Money, I Lose the Money

Many people are under the impression that if the funds in the account aren’t depleted due to the child’s education, they’ll lose that money. That’s not the case. You don’t lose the money. Instead, you’ll have to pay tax on the money earned.

Money isn’t put into the account tax-free – you already paid taxes on it.

However, you will pay a 10% non-education penalty if the funds are withdrawn for purposes not relating to education. You may be able to avoid this penalty, too.

You may open an account with a beneficiary and use the money for another child. As a grandparent, you can name several beneficiaries for whom the funds can be used, even if they were born after the account was opened.

I Can Only Use the Money in the State That the Plan is Sponsored In

Plans are state-sponsored and run with regulations surrounding them. Since they’re sponsored, the fees are very low. 

One common misconception is that if you open a plan, for example, in North Carolina, you must use the account for a child going to school in the state of North Carolina. This simply isn’t the case. The funds in the account can be used for any education-related expenses nationwide.

Accounts can be opened anywhere, so you can live in one state and open a 529 in another state.

For the most part, you can open an account anywhere and go to school anywhere. One advantage that some accounts have is that a few states allow accounts to be opened in their state to deduct the contributions from state taxes.

529 Accounts Will Eventually Disappear

Maybe. We really don’t know the future, but we do know that the Pension Protection Act of 2006 states that these plans will be in place indefinitely. Of course, the government can change this at any time, but the forecast doesn’t seem to indicate that they will remove these accounts in the future.

There is a lot of talk about the burden of high student loan payments and college costs that make it unlikely that a 529 plan would disappear in the near future.

You Can’t Change Plans

You aren’t locked into a plan, so you can change plans if you want to in the future.

How to Setup a 529 Plan

Plans are very easy to set up. It’s just a matter of looking for your state plans and filling in information online. Of course, you’ll need the beneficiary’s information, too. Once you’re done, you can start funding the account.

Major brokers have added 529 plans to their accounts, which makes it easy to get started.

When it comes time to take money out of the account, you’ll need to fill out a form explaining what the funds are used for, and that’s it.

While a 529 plan may not be the right choice for everyone, it’s a smart saving tool for a child’s college expenses. The cost of a college education is ever-increasing, and these plans can help make higher education just a little more affordable.

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