We regularly get questions from clients about how they can help provide college funding for their kids or their grandkids. One of our favorite mechanisms for future savings for college is the 529 savings plan.

With nearly a quarter of a trillion dollars invested in these plans, Americans are increasingly using it as a tool to save for future educational needs. The original idea behind a 529 plan is to allow families to save for college costs with tax-deferred earnings and tax-free distributions for college-related expenses. Some states, such as the state of Oregon, also offer an income tax break on contributions to 529 plans. Since its inception, the 529 savings plan has been broadened to allow it to be used for nearly any type of educational expense, including K-12 qualified expenses and registered apprentice programs.

Who can use funds from the 529 savings plan?

  • Beneficiary – Anyone of any age can be named as a beneficiary (e.g. relative, friend, yourself). A beneficiary can have more than one 529 plan (but only one per state).
  • Donor – Has control of the account and can change the beneficiary to another member of the family or to himself or herself.

What can the 529 savings plan funds be used for?

The 529 plan funds can be used for qualified education expenses, such as tuition, fees, books, computer technology, related equipment and/or related services such as Internet access, room and board.

Where can the 529 plan funds be used?

529 plan funds can be used at any eligible educational institution, which the IRS defines as: “… any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.”

This seems to good to be true. Why does the 529 plan exist?

In the US, college costs have outpaced inflation for decades. This is one way the government can help Americans make education more affordable. It encourages people to save money and provides a savings on your tax bill each year. If you don’t use the funds for education, you can still withdraw them, however, they will be taxed at income tax rates and subject to a 10% federal penalty tax.

How can I learn more about 529 savings plans?

We’ve just scratched the surface on the ins and outs of the 529 savings plan. We also recommend the following resources for additional information:

 

WANT TO LEARN MORE ABOUT TAX-DEFERRED SAVINGS?

READ ABOUT ROTH IRA CONVERSIONS

 

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