What is a 529 plan?
A 529 plan is a type of college savings plan. It is operated by a state government or educational institution and is designed to help families set aside funds for future education costs.
These plans are named after Section 529 of the Internal Revenue Service tax code, which provides tax benefits for contributing to a qualified college savings plan, much like contributing to a 401(k) or IRA for retirement.
While contributions to 529 plans are not deductible on your federal tax return, principal and earnings can be withdrawn tax free at any time as long as they are used to pay for qualifying educational expenses.
In addition, some states let residents deduct 529 contributions from their state income tax returns (up to a certain limit).
States that offer a deduction for contributions to an in-state 529 plan include:
- New York
States that offer a deduction for contributions to any state’s 529 plan (including out-of-state plans) include:
States that either offer no deduction or that don’t have a state income tax (meaning there are no tax breaks on 529s for residents) include:
- North Carolina
Funds from a 529 plan can be used for tuition, and in many cases expenses, at:
- State or private universities
- Vocational schools
- Any other eligible postsecondary educational institution
- K-12 private school tuition, up to $10,000 per year
While all plans can be used to cover tuition, not all plans cover room and board, supplies, books, and other expenses, so it’s important to understand the types of plans and what they cover before enrolling.
529 Plan Types
|Item||Prepaid Tuition||College Savings Plan|
- Of families who consider saving for college a priority, less than 10% have a 529 plan in place.
- In some states, contributions to a 529 plan may be matched by the government, just like an employer matching 401(k) contributions.
- The average cost of a single year of college increased 476% between 1985 and 2015, skyrocketing from $4,163 to $21,728.
- http://www.onlinecollege.org/2011/08/07/15- facts-all-parents-should-know-about-529-plans/