529 Plan: Everything you need to know while saving for college

According to a report, around 29% of parents with children under the age of 18 in the US invest in a 529 Plan to save for their children’s education. Studies have also shown a steady increase in the amount of savings and withdrawals in such plans over the years. If you too want to save in a 529 Plan for your child’s educational dreams or if you have already saved in such a plan and want to withdraw the money, then here’s everything you need to know:

What is a 529 Plan?

A 529 Plan is a saving plan that is designed to encourage people to save for college. This plan offers tax and financial benefits. In legal terms, this plan is known as qualified tuition plans. It is sponsored by educational institutions, states, or state agencies. There are two types of 529 Plans: prepaid plans and education savings plans.

How to choose the right 529 Plan?

It is important to understand that different states may have different rules related to a 529 Plan. You may take the guidance of professional advisors in order to understand the rules and regulations of different states. Meanwhile, you can compare different plans on factors such as:

• The fees related to the plan – account maintenance fees, management fees, etc.
• The taxes on your contributions
• The paperwork involved
• The scholarships offered if any

How to withdraw from a 529 Plan?

The withdrawal process of a 529 Plan is simple, easy and quick. All you need to do is log into the online 529 Plan account and request a withdrawal. Most of the banks send cheques or pay the amount electronically directly to the school or the beneficiary. However, it is essential to consider some key factors before withdrawing any amount:

• Before withdrawing the money, you must keep a few documents handy. This includes the bank account and routing numbers of the beneficiary or the school and the student ID if the payment is going to be routed to the school.
• You must know the exact amount to be paid to the school before making a withdrawal. An incorrect amount may lead to penalties.
• You must know about all the qualified and non-qualified expenses.

What can the 529 Plan withdrawals be used for?

The money from a 529 Plan can be used only for qualified expenses. If the withdrawal amount is used for non-qualified expenses, it could result in high tax penalties. Thus, it is essential to understand what can you use the withdrawals for.

Qualified expenses

529 Plan withdrawals can be used for:

• Tuition and fees for full-time and part-time.
• Books and other study material that is required for the course.
• Accommodation expenses for on campus or off campus stay. However, the expenses for off campus stay should be equivalent to or lesser than the cost of on campus stay.
• Tech-related expenses including the expense of purchasing a new computer or a printer. It also includes costs related to the internet.
• Equipment necessary for students with special needs to attend classes.

Non-qualified expenses

Let us also look at the exclusions or the expenses that are not qualified as per a 529 Plan.

• Expenses related to joining any other clubs and courses, even though educational.
• Electronics that are used for entertainment.
• Health insurance policies.
• Transportation and commuting expenses.
• Education loans or student loans.

It is critical that you read all the important documents before you choose a 529 Plan or make an investment. Read both – the inclusions as well as the exclusions.

How much can you withdraw from a 529 plan?

You save your hard-earned money to ensure that your children get a good quality education. Naturally, you would want to withdraw it when the time arises. The good news is that unlike quite a few other plans, you can withdraw any amount from your 529 plan. Moreover, this can be done whenever you want. However, you must be aware of the qualified expenses towards which these savings can be utilized. Withdrawals for non-qualified expenses may result in different kinds of tax penalties including ordinary income tax, 10% penalty tax, and even state income tax, depending on the kind of plan.

To sum it up 

Parents and students continue to explore the wide selection of 529 Plans available. Indeed, such plans help you shape your child’s future. However, to make the most of it, you must understand the nuances and details of each of them. 

Still have questions about 529 Plans? Don’t worry! There are several financial advisors waiting to assist you. They will not only address your queries but also help you choose the right the plan.