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Understanding College 529 Plans

May 13, 2016
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We have mentioned 529 plans a few times in our blog posts. We mention them often because college tuition is only getting more expensive and it’s smart to start saving for it sooner rather than later.

If you plan on paying for your children’s education, we recommend a 529 plan as a great way to start saving. Let’s go over what a 529 plan is and how it helps you save money.

The Types of 529 Plans

First thing to note is that there are two types of 529 plans: savings plans and prepaid plans.

Savings Plans

Similarly to 401K plans, with these types of 529 plans, you add money to the account and the money is invested in a variety of different stocks, bonds, mutual funds, and/or money market funds. All 50 states offer this type of 529 plan and they are often more flexible because you can use the money for most qualified college expenses including tuition, room and board, and textbooks.

Prepaid Plans

With these types of 529 plans, you prepay for semesters of college tuition at the current rates. This locks in the price so you don’t have to worry about increasing tuition prices.

However, these plans are more restrictive and not all states offer them. These plans only lock in tuition prices at certain participating schools; if your child attends a school not on the list you will be able to transfer the value, but there is no guarantee that it will be enough to cover the full cost of tuition. Also, some of these plans only cover tuition and no other college expenses such as room and board, or textbooks.

Tax Benefits of 529 Plans

Earnings in a 529 plan grow federally tax-free and, in addition, will not be taxed when the money is withdrawn to use for college expenses. Some states also offer a full or partial tax deduction or credit for 529 plan contributions.

529 plan contributions are considered gifts to the named beneficiary in the eyes of the government, but deposits up to $14,000 per individual per year qualify for the annual gift tax exclusion. Just be aware of your contributions if you are making other gifts to the same beneficiary in the same year.

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529 plans have no income limits, age limits, or annual contribution limits. Total maximum contribution limits are typically quite high – ranges from $235,000 to $400,000 – so by the time you would be reaching the maximum plan amount, you should have enough to handle the majority of most college expenses.


The named beneficiary (your child) has no legal rights to the funds so you can be sure that the money will be used for its intended purposes. There are some exceptions to this rule in regards to custodial accounts under UGMA/UTMA, but for the majority of cases you are in control of the plan.

If your child decides not to attend college, you can either transfer the plan to help someone else pay for college or withdraw the funds to use for other expenses. It’s important to point out though that if you do not use the money for educational expenses, the IRS will charge you income tax and an additional 10% penalty tax on your investment earnings.

These college saving plans are convenient because you can “set it and forget it.” Check out SavingforCollege.com to learn more, including how to set up a 529 plan in your state.

Thinking about your child’s future may be something that keeps you awake at night, but hopefully a 529 plan can help you manage the college tuition part.

Life insurance also helps protect your child’s future and should you die prematurely, the death benefit can provide funds to help pay for everything they need, including college tuition. Term life insurance is simple, customizable and affordable. Get a term life insurance quote today.


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