Like everything else, the cost of post-secondary education rises each year. Young parents can be overwhelmed at the prospect of this major, down the road expense. There’s no real magic solution. If there’s magic at all, it’s in the effects of saving early and compounding interest. It’s not glamorous, but it gets the job done.
When you add tax savings into the mix it gets a little more attention, and this is where the 529 Plan comes in. Named after Section 529 of the Internal Revenue code, this is a Congress-enacted Qualified Tuition Program began in 1996. While contributions to a 529 plan aren’t deductible, investment earnings within the plan grow tax-free at the federal level, and usually at the state level. Savings within a 529 plan can be spent on most reasonable educational expenses for the plan’s beneficiary. These include:
- School fees
- Room and board
- Computers, printers and other tech equipment necessary for school (Sorry, not a new Xbox)
- Internet access
Free and Easy
Anyone can set up a 529 plan and they can also name anyone as beneficiary – even themselves. There’s also no limit to the number of plans one person can create. The biggest restriction is that there is only a single beneficiary per plan. Families with three children could open plans for each child. It is possible, though, to change a beneficiary within one family without resulting in tax penalties, so if only one child pursues an education, the assets of the other plans could roll over into that child’s plan.
Tuition and Savings
There are two general types of 529 plan, one that essentially prepays tuition and one that’s a more general savings plan. Each state has its own 529 program and features vary between them. Fortunately, person isn’t tied to the plans of their own state, nor are beneficiaries limited to schools in the state issuing the plan. Note that there are differences. The 529 market is competitive, so different plans offer different features to lure investors.