A number of our clients have been asking how they can help provide college funding for their kids or their grandkids, so we thought we would provide a quick overview of 529 college savings plans.
With nearly a quarter of a trillion dollars invested in these plans, Americans are increasingly using the 529 plan as a tool to save for future education needs. The basic 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.
- 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 funds 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 funds 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.”
- Increasing college costs – in the U.S., college costs have outpaced inflation for decades.
- If you don’t use the funds for education, you can still withdraw them, though they will be taxed at income tax rates and subject to a 10% federal penalty tax.
Please let us know if you have any other questions on the 529 plans. We also recommend the following websites for additional resources and information: