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What Is A 529 Plan
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Article on What Is A 529 Plan
Once you determine that it is time to start saving for college, there are many investment opportunities to choose from. What is a 529 plan? This plan is a tax-advantaged savings account for college education with many excellent benefits. These benefits include account control and tax exemption on earnings. The plan offers two different savings programs, the prepaid tuition program and the college savings plan.
Account Control
One benefit of investing in a 529 plan is that the owner of the account remains in complete control of the money. Anyone can open a 529 account for anyone and many people can contribute to this account. The child (or the student) is the beneficiary; this beneficiary can change over time. The beneficiary never gains complete control over the account. This prevents students from using the account on anything other than education.
Tax Benefits
Although the money is taxed as income before it is saved, Earnings on 529 plans are exempt from federal tax if the money is used on education. If this money is used elsewhere, however, additional fees apply. State backed programs, such as the prepaid tuition 529 plans, offer breaks on income tax or matching grants for investing. Carefully review state requirements for discrepancies, therefore, when choosing an investment plan.
Prepaid Tuition Plans
State government backed 529s are called prepaid tuition plans. These plans allow the purchasing of credits at participating universities for future tuition, locked in at current tuition prices. These credits can only be purchased for eligible private colleges and universities. Although 529 plans generally only cover tuition and mandatory fees, some plans offer room and board credits. Many restrictions apply, including age limits, residency requirements, and limited enrollment periods.
College Savings Plans
College savings plans are 529s that are not backed by the state. Accounts are opened for beneficiaries and the savings are invested. As they are invested in stock mutual funds, bond mutual funds, money market funds, and age-based portfolios, they are subject to some market risk. This means your investment does not guarantee a return and market movement could potentially decrease your investment. For this reason, the restrictions are fewer. There are no age limits and no residency requirements.
Fees and Expenses
Enrolment and administrative fees are generally associated with prepaid tuition plans. This is generally the cheaper of the two plans. College savings plans can include enrollment, annual maintenance, and asset management fees. Since they are managed through a broker, additional fees include commission on earnings and an annual distribution fee. Withdrawing money from either account without using it on college expenses will subject it to income tax and a 10% federal tax penalty on earnings.
The tax-advantage saving and the account control are excellent benefits of the 529 savings plans. These plans differ greatly by state and by plan manager, however. When investigating the right option for you, therefore, be sure to examine provider centric benefits, restrictions, and fees. Shop around to find the perfect fit before investing, as many options are available, and penalties can be high if funds aren’t used for continued education.
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