What Is a 529 Plan?

July 02, 2019

529 Plans are one of the most popular savings vehicles for higher education, giving individuals a way to save on behalf of a beneficiary.  Also known as qualified tuition plans, 529 plans are “sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code [1].” 

What are the Types of 529 Plans?

Prepaid Tuition Plans

Prepaid tuition plans allow individuals to prepay tuition at its current rate.  Because this type of plan locks in the rate, it can help to ease concerns about inflation and the rising costs of a college and university level education. 

However, many prepaid plans have specific residency requirements and/or guidelines for where a student may choose to attend college/university (typically in-state, public institutions).  At the time of publication, 16 states have an option for a prepaid tuition plan:

Alabama Massachusetts Tennessee
Colorado Michigan Texas
Florida Mississippi Virginia
Illinois Nevada Washington
Kentucky New Mexico West Virginia
Maryland South Carolina Wisconsin

Education Savings Plans

An education savings plan is a savings account made up of mutual funds, ETF’s, etc. from which funds can be used specifically for higher education purposes.  This may include, but is not limited to, tuition, fees, room and board, technology/equipment, and books. 

Investors can typically be more aggressive with their investment strategies when children are younger.  However, as the child gets closer to college-age, it is usually recommended to switch to a more conservative approach.

In 2018, a new tax law was implemented so that $10,000 per student per year can be used toward private elementary or secondary school (for tuition only).

You can choose any state’s plan, regardless of your state of residency; however, each has its own set of fees and benefits.  For example, if you are a Georgia resident and you choose to invest in Georgia’s Path2College 529 Plan, you can claim a state tax deduction for your contributions.

What are the Benefits?

In addition to state-specific advantages, there are general benefits that all 529 plans provide:

  • Anyone can make a contribution
  • The plan can be transferred to any family member or beneficiary
  • No income limits—anyone can open and contribute regardless of their income
  • It is a low maintenance investment option
  • The plan owner, not a beneficiary, maintains control of the plan

Tax Benefits

Tax benefits vary from state to state, and it is always best to consult your accountant regarding your specific circumstances. But in general, the following benefits will almost always apply:

  • Withdrawals are not subject to federal taxes if taken for qualified expenses
  • Earnings grow tax-free
  • Contributions are typically exempt from gift taxes
  • Contributions may be fully or partially deducted from state income tax (currently in more than 30 states)
    • You may only be eligible if you invest in the 529 Plan from your state of residency

How Do I Open a 529 Plan?

Before opening a 529 plan, you will want to research all available options.  If your state offers benefits for its residents, that may be the best option.  If not, you may find that another state’s plan will be a better fit.

Once you have made a decision, visit the plan’s website to open the account and choose your investment options.  A money manager, like Howard Capital Management, Inc. (HCM), can then help you make the most of your investment.

When Should I Open a 529 Plan?

Many parents choose to open a 529 Plan as soon as their child is born, allowing the investment to grow for 18 years before using it for higher education. Your financial advisor may also suggest investing in a 529 Plan in conjunction with a Roth IRA to maximize your savings.

Contact Howard Capital Management, Inc.

At Howard Capital Management, Inc. (HCM), we understand how important it is to work with someone you trust, that will create and deliver on a personalized plan which has your best interest in mind. By planning for your financial future now, you can make saving for higher education an exciting and smooth process.