When it comes to saving for college, 529 plans are often at the forefront of many parents’ savings research and goals. However, there are a lot of rules and information to digest.
States offer 529 plans to give parents a way to save for their kids’ college tuition. Parents who start saving in a 529 account when their children are young benefit from significant tax savings and tax-free compound interest. This is provided that the money is used to pay for qualified expenses. Some states also offer a tax deduction on contributions into the 529 plan.
Knowing the 529 plan rules will help you maximize the benefits these plans offer.
You Can Invest on a 529 Plan in Any State
Every state offers at least one 529 plan. The benefits of these plans may vary from one state to another. You can invest in any state’s plan that offers the best tax benefits. Some states offer residents a state tax deduction if they invest in the state plan, however, not all offer it. If your state doesn’t offer any tax benefits, it makes better sense to shop around for a plan that does.
Regardless of where you choose to invest, it won’t affect your child’s choice of college. Students can use the funds to pay the tuition in any qualified college anywhere in the US.
The Account Holder Controls the Funds
The parent is the account holder of a 529 account and the child in whose name the account is opened is the beneficiary. As the account owner, the parent controls the funds in a 529 plan, not the beneficiary.
This means parents can withdraw the funds at any time if they wish to. However, if they do withdraw any funds, they could lose certain tax benefits and also be subjected to penalties.
A Look at the Contribution Limits
According to the IRS, contributions into any 529 plan should not exceed the amount required to fund the beneficiary’s qualified education expenses. In order words, the IRS has not set a specific contribution limit. However, many states impose limits on how much parents can contribute towards a 529 plan. In most cases, the limit is $300,000.
When looking for a 529 plan to invest in, it is advisable to check the contribution limits of the plan. In addition, you should also check if larger contributions have any gift tax implications.
Rules Regarding Qualified Distribution of 529 Funds
The funds from 529 plans are meant specifically for the purpose of covering qualified higher education expenses. Therefore, it is important to understand what expenses qualify.
529 funds can be used towards most major college expenses such as tuition, fees, textbooks, and room and board. It can also be used to pay for computers and peripheral equipment such as a printer.
Any withdrawal made to pay for non-qualified purchases will attract a 10% penalty in addition to income tax. There are no penalties on the principal amount.
The Account Holder Can Change the Beneficiary at Any Time
If the beneficiary of a 529 account chooses not to go to college, the parent can change the beneficiary so another child can use the funds.
529 plans are a great tax-free investment that will pay off when it’s time to pay for college. Understanding 529 plan rules is important for two reasons. Firstly, it helps you maximize the benefits of these plans. Secondly, it ensures that you don’t get penalized for inadvertently breaking one of the rules.
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