Introduction to 529 Education Savings Plans

Introduction to 529 Education Savings Plans

The key to being prepared is to learn about stuff before you need them and learning about 529, for me, certainly falls into that category! A 529 plan is an educational savings plan named after the section of the federal tax code that outlines the rules for them. Basically there are two types of 529 plans, prepaid tuition plans and college savings plans, but they are generally designed to help you save towards college for your children.

Prepaid Tuition Plans

Essentially what you do is prepay tuition at an in-state institution at current rates, regardless of when the beneficiary could potentially go to that institution. Lastly, if your child decides they don't want to go to that school, you can still use the money for out of state schools but it may be adjusted.

College Savings Plans

The other type of plan, the College Savings Plan, is a little more involved and has more rules but it basically sets up an investment account that grows tax free, as long as you use the money for education, in state, out of state, undergraduate, graduate, it doesn't matter as long as the university or college is accredited. The account is handled by an investment company, which in Maryland is T. Rowe Price, just like any other investment account. What you're allowed to invest in will depend on the rules for your state but in general you can invest in a variety of managed investments (so not individual stocks, which kind of sucks for you but is probably a boon for brokerages).

So, as I mentioned before, the growth is tax free as long as it's spent on eligible education expenses but there are more benefits. While there is no limit, contributions are considered gifts so you're subject to the reporting and tax limit of $12,000 per year (if you give under $12k, you don't need to report it) and $200,000 over your lifetime. You also retain control of the account, despite the beneficiery being your child, which is different from other accounts like Coverdell Education Savings Accounts. Lastly, contributions may be state tax deductible.

Whew it's scary to think about, especially for me, but it's good information to know.

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