If you are thinking about having children, or already have them, you must be wondering how you are going to pay for college. A 529 college savings plan may be a great option for you. With college costs continuing to increase, it is great to get a plan in place for your child’s future and education.
Let’s take a closer look at this type of savings plan and how you can get started.
What is a 529 Plan?
A 529 account is named after Section 529 from the Federal Tax Code and is a tax-advantaged saving account designed specifically to help people pay for education. While it originally started to help with secondary education, it has expanded to cover kindergarten through high school as well as apprenticeship education. There are two different forms of 529 accounts: saving plans and prepaid tuition plans.
The accounting world of Roth IRAs, 529s, and tax savings can all get a little confusing, let’s dive a bit deeper.
How Does a 529 Plan Work?
529 plans are normally created by parents but can be opened by anyone. The money deposited into the account will grow on a tax-deferred basis until withdrawn and as long as the money is used for qualified educational purposes, it will not be subject to state or federal taxes when it is withdrawn.
To learn more about contribution rates limits and how a 529 savings plan may interact with something like financial aid, please give our professionals a call today. Schedule a call here by clicking this link.
Types of 529 Plans
As we mentioned before, there are two different types of 529 plans to help with education savings, let’s take a look at both.
529 Savings Plan
Savings plans are the more common of the two types of 529s. In 529 savings accounts, the account holder will contribute money with which they can invest in a selection of mutual funds. Account holders can adjust and change the funds they are invested in and watch as the savings account grows over time.
For 529 savings plans, qualified withdrawals include expenses for tuition, room and board, additional fees, and more. To learn more about what expenses are not subject to state or federal taxes, call our team today at 408-978-6215.
529 Prepaid Tuition Plan
Prepaid tuition plans on the other hand are only offered in selective states and are a bit different. While you can contact a professional to learn specifics, essentially the account holder locks in tuition at the current rate for a student who may not be attending college for many years down the road. Again the money that comes out of this plan is not taxable. However, some colleges don’t accept this type of payment plan and prepaid tuition plans also do not cover room and board.
Overall, both of these types of college savings accounts will help your child or loved one avoid the rising costs of college and help them escape the student loan and debt problems.