The importance of getting a college education has only increased with time, with almost everyone today aiming to study further and get a degree in a subject that truly interests them. It’s not just about parents pushing their children to get into college anymore; even students are equally invested in working towards a bright and fruitful future.

However, it’s no secret that getting a college education is not a very affordable process and can put quite a financial responsibility on the family. Hence, saving up money is the best way to keep money aside and use it when the time is right. And, thankfully, there are a number of plans that can aid people with saving money for college.

What is a 529 Plan and Section 529?

The Congress passed the Small Business Job Protection Act in 1996, and Section 529 was created as a provision of this act. Qualified Tuition Program is the legal name of this section. A 529 college savings plan basically created accounts where parents were encouraged to keep money aside for College and were offered attractive tax benefits for doing so. All of this and more, while still retaining their permanent possession over their assets. The 529 plan was a much-needed step towards creating better education opportunities for people.

What are The Criteria for Eligibility?

The eligibility for these 529 savings plans is more relaxed when compared to conditions that are specified for other financial saving plans, like 401Ks and Roth IRAs. Irrespective of their salary or annual income, anyone can contribute to a College saving plan under Section 529. It is important though that they are well aware of the limitations under US Gift Tax and also know how different slabs and amounts of gifting can affect their estate taxation. If the contribution happens to exceed the required amount for the education, or there have also been gift contributions towards the same beneficiary that totally exceed the limit, then it would be charged under Gift Tax.

While picking a college and a 529 college savings plan, the party must be careful to check whether or not that institution has a student aid program that is verified by the US Department of Education.

What is a 529 Plan Beneficial for?

The most important and attractive benefit of a 529 plan is that any amount of money that is withdrawn from the account for the purpose of funding qualified and verified higher education is completely exempt from taxes under federal income. Some states also offer incentives on these withdrawals. This is what encourages parents to create these 529 savings plan accounts and not fear to have to pay extra taxes on these savings.

How it Works?

First, the parent or guardian needs to create a savings account under this section. An interesting tool is a 529 plan calculator. They can use the help of a 529 plan calculator to choose the best 529 plan. Once that is done, they must enlist a beneficiary, i.e., someone who will be benefitting from the money that is saved in the account. This beneficiary is the student who is planning to go to college using these funds.

For such an account, any growth or increase in the original investment isn’t taxed under the law. Expenses that can be included under this fund are transportation to College, study material, uniforms, and so on.

If any of the expenses are not considered qualified educational expenses under federal law, then there will be a tax levied and also a penalty of 10%.

What Happens if The Original Beneficiary Doesn’t End up Using The Money for College?

In such a case, if the student decides to not go to college and the money remains unused, then the account holder can switch the beneficiary status to an immediate family member who is also a student looking to be funded for college. The same tax exemption applies even in such a case, and the IRA rules are very easy-going and flexible for the people involved.

An account under Section 529 is considered an asset under the name of the parent and/or account holder. And while custodial accounts usually expect 20% of the assets to be contributed towards study expenses, only 5.6% of these accounts are expected to be used as a minimum.

Note: There are 2 main types of 529 plans for college savings

The first type is Prepaid. This type of plan locks in the costs according to the current financial year. This means that while tuition fees are most likely to increase with every year, this plan can be used to pay only the current tuition cost when the student begins their course. However, this type of plan has its drawbacks; it doesn’t cover expenses like books, transportation or buying other study related material. Also, most of these plans are run by state institutions, which means that the student can enroll only into a state-run university.

These could be the reasons why most of the prepaid plans have been stopped completely.

The second type of plan is the savings investment plan. Currently, these plans are more extensively used and have become popular due to their surety, safety and also their perks.

How Can One Apply?

529 plans and their specifics differ from state to state. Investment managers also differ in this category and each state has different policies when it comes to managing funds that are also assets. California 529 plans have various incentives to offer and actually have some of the best 529 plans in the market. Each plan is unique in its own way and offers variations of mutual fund investment options. Essentially, one must assess how much risk they’re willing to bear and pick a mutual fund that will be best suited to their needs. For this, it’s usually better to use a 529 plan calculator and also avail the guidance from a proper professional financial advisor who has expertise in the matter and will guide the client through all the different procedures and regulations.

Although there are tax benefits, they don’t apply to all states. So it’s safer to find out if the client’s state offers those exemptions and then proceed from there to picking the best 529 plan. The client must also know that they are not restricted to the 529 plan of their own state, and can do the required research and choose to opt for a plan from another state if it suits their needs better.

In conclusion, parents must definitely consider a 529 college savings plan and invest in them because they ensure a safer and more secure educational future for the student and also greatly encourages getting a college education, which holds a lot of value throughout a person’s career and life.