Section 529 Plans: College Savings Plans

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Section 529 Plans: College Savings Plans

Also known as qualified tuition programs, 529 plans are a newer thing in college savings. They are offered in most states, although you needn’t necessarily use your own state’s plan—but there could be state tax benefits if you stay with an in-state plan.

Individual states sponsor 529 plans. The state sets contribution limits and investment guidelines that the plan must follow. These plans are then administered by an investment company of the state’s choosing. Fidelity, TIAA-CREF, and Vanguard all administer 529 plans, for example.

To find more information

Because there’s such variety among plans, you need to do some legwork. You don’t need to become footsore, though—try out various online tools such as those offered by Morningstar that analyze 529 plans.

There are two types of 529 plans: college savings plans and prepaid tuition plans. This article focuses on the former.

Here are answers to some college-savings-plan questions:

• How much can I contribute to the plan? The amount you can contribute varies from plan to plan. The best news: Anyone can contribute to 529 plans, regardless of your current income.
• What are the plan’s investment options? When it comes to investment options, each state has its own roster. If the lineup in your state’s plan doesn’t suit you, choose a plan outside your home state.
• What are the taxes? Withdrawals for qualified expenses are tax-free from federal taxes.
• Who controls the money? You’re in control, because you select the plan and can determine how much you’ll contribute.
• Can the money in the plan be used for anything other than education? Proceeds of the account can only be used for qualified expenses. However, you can transfer the account to another child if the original recipient doesn’t use it. The new tax laws passed in 2017 and 2019 allow 529 account funds to be used for levels of education other than college, for example, private school and tutoring expenses up through 12th grade; and for qualified student loan repayments up to $10,000 per year. And more recently: starting in 2024, the law will allow 529 plan money to be rolled into a Roth IRA for the beneficiary, provided that certain requirements are met.

These plans are great, especially for high-income investors. Many plans allow you to contribute as much as $200,000 or more up front (though the gift tax may apply for large contributions), and withdrawals for qualified expenses aren’t taxed under current law.

Do some homework first

Evaluate a 529 plan’s investment options as you would any mutual fund. Understand how they invest, examine their performance, and understand all fees associated with them. And remember that you can shop around—you don’t have to invest in your state’s plan.