Part Two: 529 College Savings Plans - Save for Your Child’s Future and Save on Taxes
Today, nearly every state offers at least one 529 college savings plan. 529 plans are state-sponsored savings plans with tax advantages that may make it easier to save for college and there are many good reasons to open one sooner rather than later. In addition to the advantages noted in part one of this series, here are some additional points to consider.
You can choose nearly any state’s plan. Most states allow both residents and nonresidents to participate in their plan. This gives you the freedom to choose nearly any plan in the country, regardless of where you or the beneficiary lives or where the beneficiary will attend college.
When choosing a plan, remember that although all 529 plans offer the same federal tax benefits, they differ in other ways. For example, investment options, performance, and fees differ among plans. You can find this information and more in the plan’s official statement.
Consider your own state’s plan. It may offer perks that you will not find elsewhere. For example, some states offer residents who choose an in-state plan:
- A state tax deduction for the money you contribute. (Some states offer residents a state tax deduction for contribution’s that they make to any state’s plan.)
- Matching grants.
- Scholarships to in-state colleges for resident beneficiaries.
High contribution limits. Each 529 plan sets a limit on the total value of the accounts opened for a beneficiary – and those limits can be high. Many plans set a limit of $300,000 or more per beneficiary, making it possible for you to save in one account for four or five years at a pricier school.
Keep in mind that the contribution limits are per beneficiary. For example, if you and your mother each set up an account in the same plan for your child, the limit applies to the total value of the two accounts. Once the limit is reached, the plan will no longer accept contributions to either account.
Professionally managed investment portfolios. 520 plans typically offer you a choice of investment portfolios, including age-based and static portfolios, and perhaps an FDIC-insured banking option.
Age-based portfolios are linked to the beneficiary’s age and automatically shift to a more conservative mix of investments as the beneficiary gets closer to college age. A static portfolio’s asset allocation will generally not change over time. For example, a static portfolio invested in 60% equities and 40% bonds will generally retain that 60/40 allocation. However, you can change how the money in your account is invested twice a year, making it possible for you to change your allocation. (Asset allocation does not ensure a profit or protect against loss in declining markets.)
You control the money. Whoever opens the account owns and controls the account. As the account owner:
- You decide how the money in the account is invested.
- You choose the timing and the amounts of the withdrawals, which helps eliminate the possibility of the beneficiary using the funds for something other than college.
- You can change the beneficiary to an eligible member of the designated beneficiary’s family. This feature comes in handy if the original beneficiary decides not to go to college or if there is money leftover in the account after the original beneficiary graduates.
- You can withdraw funds for your own use. However, the withdrawal will be considered a nonqualified distribution. This means that the earnings portion of it will be subject to income tax and generally a 10% federal tax penalty. Also the contribution portion of it may be subject to the state tax if you previously deducted your contributions on your state tax return.
If you prefer not to control the account, you can generally contribute to a 529 account that someone else has opened for the beneficiary and let that account owner handle the details. Keep in mind, though, that some plans only allow the account owner, or perhaps the account owner’s spouse, to claim a state tax deduction for contributions.