529 Plans - The Basics

What you need to know about these tax-advantaged ways to save for college.

Whether you already have children or you’re planning to start a family someday, the sooner you start to put money away for college, the better.  That’s why we encourage you to learn all you can about 529 plans, a college savings plan created to help families save for education expenses and get a tax break in doing so.

 

Here are some 529 plan basics that every family should know.

 

What is a 529 plan?

According to the U.S. Securities and Exchange Commission, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” were added to the Internal Revenue Code (IRC) in 1996.

 

How do 529 plans work?

  • 529 plans offer tax and financial aid benefits to the person funding them (account holder). Earnings in 529 plans accumulate on a tax-deferred basis and distributions are free from federal and state income tax when used for qualified education expenses.

  • 529 plans are offered/sponsored by states, state agencies or educational institutional agencies. All 50 states and the District of Columbia sponsor at least one 529 plan. 

  • You can invest in any state 529 plan, not just that offered by the state in which you reside.  Also, the student (beneficiary) is not required to attend a school in the state where the plan was opened.

  • You can change the named beneficiary of a 529 plan at any time.  However, if you change it to someone other than a family member, there may be tax implications.

 

Are there different types of 529 plans?

Yes, there are two types: Prepaid Tuition Plans and Education Savings Plans.

  • There are important differences between the two types –– fees, certain restrictions, expenses, investment options, to name a few.  (For details, ask your Lenox financial advisor, contact your 529 plan sponsor, or visit www.sec.gov.)

  • You can find out more about a particular 529 plan by reading its offering circular. The National Association of State Treasurers created the College Savings Plan Network, which provides links to most 529 plan websites. 

 

How can 529 plan savings be used?

  • A 529 plan can be used to save and pay for higher education costs –– tuition, room and board, computers, and other qualified expenses. The plan also may be used to pay for up to $10,000 annually for K-12 tuition. 

  • In most cases, your 529 plan can be used to cover expenses at any qualified college or university.  There are more than 6,000 qualified colleges and universities in the USA and an estimated 400+ eligible outside the USA –– most anywhere federal financial aid   is accepted. (Check with each individual plan for its list of qualified schools.)

 

Who can open and contribute to a 529 plan?

  • Parents and/or grandparents can open a 529 plan and be the account holder for a student (beneficiary).  (See our prior blog, “Grandparents and 529 Plans” for information on why parents instead of grandparents might want to be the plan’s account holder.)

  • You can even open an account before a baby is born, opening it in your own name and   transferring it once the baby is born and has a Social Security number.

  • Anyone can contribute to a child’s 529 plan –- aunts, uncles, other family and friends –- which makes the 529 a good idea for birthday or holiday gift giving.

  • The account holder will want to name a successor as you would with any other assets in the event of death or inability to continue as account owner.

 

How is your money invested?

  • Generally speaking, 529 plan contributions are invested in mutual fund-based investments.  Some plans also offer FDIC-insured banking options. 

  • You can typically choose from planned portfolios or create your own investment options.

  • To see which investment options are best for you, check with your financial advisor. 

 

Let us know how we can help.  Lenox professionals are here to explain 529 plan fundamentals and to help guide you in your plan selection and investment options.  Give us a call at 513-618-7080.

  

At Lenox, we work with families to help guide them in every aspect of their financial life –– from education funding, to generational planning and finances, to setting financial priorities, to eliminating debt, establishing budgets, career planning and coaching, retirement planning, and working through financial hurdles –– the entire realm of wealth creation, wealth building, and wealth management.  In every instance, we start with you, not your portfolio to help you FUND A LIFE YOU LOVE™.

If you’re ready to discuss financial, business, career and life planning that will allow you to Fund a Life You Love®, we’d love to tell you more.  Let’s talk.  It’s your tomorrow. Call us for a complimentary 1-hour review.  Call 513.618.7080 or visit www.lenoxwealth.com to Fund a Life You Love.

 

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This blog is limited to the dissemination of general information pertaining to its investment advisory/management services. This is not intended to be personalized investment advice. Please contact a Lenox adviser if you would like additional information.