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15 Facts All Parents Should Know About 529 Plans


Saving money for college can be a scary thing. It's hard to know how much you'll need, how you're going to save, and where you're going to put the money until you need it, possibly 18 or more years from now. 529 plans can help take some of the burden off parents, offering a tax advantaged way to prepay for tuition, or invest and grow your college savings. They're a great choice for many families, but there's so much that most people, even those with 529 plans, don't know. Read on to learn about 15 facts all parents should know when considering starting a 529 plan for their children.

  1. The earlier you start, the better

    As with all college saving, getting started early on a 529 can pay off big time. Start when your baby is born, and you could be thousands of dollars ahead of where you'd be if you waited five years. Babble crunched the numbers, reporting that by investing just $50 a month when your child is born, you'll have more than $17,500 when it's time for college, which is $6,000 more than you'd have if you start saving five years later. Take advantage of time while it's on your side, but remember that it's never too late to start.

  2. You can prepay tuition

    You may be familiar with 529 college savings plans that invest your money to grow until you're ready to send your child off to college, but prepaid tuition plans exist as well. With a prepaid tuition plan, you can lock in tuition prices at eligible public and private colleges and universities. With tuition costs rising constantly, many families are increasingly attracted to this option that essentially future-proofs your child's education. By buying tuition credits, you can pay for your child's future tuition and fees at today's prices, and then lock them away until you're ready to use them.

  3. Anyone can contribute

    Grandparents, aunts, uncles, and friends often want to help out with college expenses, frequently in the form of savings bonds. Although bonds can be saved and used for school, 529 contributions are often an option as well. Parents own 529 accounts and set their child as beneficiary, but for most plans, anyone can make a contribution to the account. Many plans offer printable gift coupons: one part that is mailed with a check to the plan administrator, and another that can be sent to parents as a notification.

  4. You can only make one change per year

    Investment 529 plans can be impacted by the stock market, and panicked investors may be quick to change investments. But if this is the case, it's important to remember that typically, you are only allowed to make one investment change per year. Of course, there can be exceptions to this rule, and with the volatile market of 2009, the IRS made a one time exemption that allowed for two changes but there are no plans to make this exemption again.

  5. You can transfer funds

    So, you've saved for years and years, growing a great nest egg for your student to use in college. But what happens if your child has other plans? Or, in a brighter scenario, what happens if he or she lands a great scholarship and doesn't need all of the funds from your 529? Your money isn't locked away, only to be used for one student. It is transferable to another beneficiary, like a younger sibling, or even a parent going back to school.

  1. You may be able to get state tax deductions

    Many states offer tax deductions for 529 plan contributions, but only for money contributed to the plan in that state. This is a great way to get a tax savings, but only if you plan to remain in that state. If you open a plan in one state, then move, you can still use the funds, but you will no longer receive state tax deductions for your contributions, as only residents are eligible.

  2. You can roll savings bonds into a 529

    Some grandparents and others giving gifts prefer to do so in the form of savings bonds, but if you would like to use the funds for your 529 instead, you can do it without penalty. Just cash them out, and reinvest in your savings plan. When you do your taxes, you will need to remember IRS Form 8815, which excludes savings bond interest from your income taxes.

  3. States may match funds

    Like with 401(k)s, you may find yourself in a fortunate situation with matching funds for your 529. Some states offer matching contributions. Often, they can be small and tied to income levels, but it's free college money nonetheless. These matching funds programs offer a great incentive to stick with in-state schools when the time comes.

  4. 529 savings plans are treated as parental assets

    Who cares if 529 plans belong to the parent or the student, it's all going to the same place, right? Correct, but when it comes to need-based financial aid, it's ideal for money to be on the parental side. Students are expected to contribute 35% of their assets and 50% of their income, while parents only contribute 5.64% of their assets and income. Several thousand dollars in a 529 allocated to parental assets makes much less of a difference than the same amount in a student's financial portfolio, allowing room for more financial assistance if necessary.

  5. Contributions are nearly limitless

    Although 529 savings plans typically have a $20,000 limit, prepaid plans do not, and you can open as many plans, both prepaid or savings, as you want. That means you can save as much as you want for college, if you have the funds to do so. Of course, that money has to be used eventually, but even if you over-fund one student's college savings, 529 funds can be used for a sibling, cousin, or even a parent.

  1. You may owe taxes if you're not careful

    529 money grows tax free, and withdrawing for college usually doesn't trigger taxes. But if you're not careful, you may owe. Withdrawing more than a student's college expenses can stick you with a penalty, as well as income taxes on the extra cash. Additionally, "double dipping" on your taxes by claiming education tax credits for the same expenses paid for with a 529 can trigger a punishment for claiming a tax freebie twice. Be sure to read the IRS publication Tax Benefits for Education when planning withdrawals and taxes related to your 529.

  2. Watch out for fees

    Although 529s are a smart way to save for college, there are some plans with extremely high fees that can eat into your savings. Annual fees, such as maintenance and asset-based management fees can hit hard, and in some cases, eat up more than you earn in investments. However, you may find that your savings plan waives annual maintenance fees if you're an in-state resident, make automatic contributions, or maintain a large account balance. Be sure to read all of the fine print and find out if your plan is subject to fees that can wipe out your earnings.

  3. A savings plan may earn you more than you'd save going prepaid

    Many families today are spooked by the stock market, and at the same time, scared of rising tuition costs, sending them running to prepaid plans that lock in tuition without the volatility of investment. But that's not always the right choice for every family. Savings plans, with smart investment decisions, can do much better earning money in stocks, outpacing the money you'd save by purchasing prepaid to hedge against inflation and tuition increases. Of course, for those that don't consider themselves savvy investors, prepaid plans may be the way to go.

  4. There may be restrictions on age and enrollment

    529 savings plans are open to enroll in all year, but prepaid plans have a limited enrollment window. Typically, newborns (up to 1 year old) may enroll at any time. If parents miss this initial window, they'll have to wait until the plan opens enrollment to everyone, which can be several months away. There may also be age restrictions for using the funds, or limits on educational expenses covered, so be sure to read the fine print.

  5. 529 plan funds are controlled by the parent

    529 plans have a named beneficiary, your child, but the account and the money itself is controlled by you alone. That means parents can build a nest egg without worrying that their child will run off with the money and take a wild trip to Cancun, a possibility with accounts that are kept under the child's name. This also makes 529s a safe bet for divorced parents, as each parent can own the assets, controlling their portion of college funds without worry about one raiding another's stash of money.

August 7th, 2011 written by Staff Writers

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