529 Plan

A Penny Saved Is A Penny Earned

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.

Why useful

  • Tax Advantages: While contributions to 529 plans are not deductible on your federal tax return, any earnings generated by fund investments can be withdrawn tax free at any time as long as they are used to pay for qualifying educational expenses.

In addition, some states allow contributions to state-funded plans to be deducted on your state tax return.

Deduct Full 529 Plan Contribution

  • Colorado
  • New Mexico
  • South Carolina
  • West Virginia

Deduct Partial 529 Plan Contribution

Limit exceeds average annual contribution:

  • Alabama
  • Illinois
  • Michigan
  • Mississippi

Lower limit means most people can take only a partial deduction:

  • Maryland
  • Ohio
  • Pennsylvania
  • Virginia
  • Wisconsin

Funds from a 529 plan can be used for tuition and expenses at:

  • State or private universities
  • Colleges
  • Vocational schools
  • Any other eligible postsecondary educational institution

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


Fun facts

  • 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.

References

  1. https://www.sec.gov/reportspubs/investorpublications/investorpubsintro529htm.html
  2. https://www.irs.gov/uac/529-plans-questions-and-answers
  3. http://www.bankrate.com/finance/college-finance/529-plans-what-you-need-to-know-2.aspx
  4. http://www.bankrate.com/finance/college-finance/pros-and-cons-of-prepaid-tuition-plans-1.aspx
  5. http://www.businessinsider.com/this-chart-shows-how-quickly-college-tuition-has-skyrocketed-since-1980-2015-7
  6. https://www.edvisors.com/education-tax-benefits/college-savings/prepaid-tuition-plans/
  7. http://www.huffingtonpost.com/2012/08/15/cost-of-college-degree-increase-12-fold-1120-percent-bloomberg_n_1783700.html
  8. http://www.onlinecollege.org/2011/08/07/15- facts-all-parents-should-know-about-529-plans/
  9. https://nces.ed.gov/fastfacts/display.asp?id=76
  10. http://collegeparents.org/2013/02/19/529-plans-facts-and-factors-these-saving-plans/)

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