WHAT IS A 529 COLLEGE SAVINGS PLAN?

Advertisement BestValueSchools.com is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.

Are you ready to find your fit?

WHAT IS A 529 COLLEGE SAVINGS PLAN?

 529.jpg November 6, 2013 515 × 325 Edit Image Delete Permanently TitleCaption

Most parents probably agree that education is the best investment in a child’s future. Consequently, steadily-rising college tuition is of grave concern among this faction. In like paternalistic fashion, Uncle Sam has responded to this widespread worry by providing a means to accelerate and automate saving money for educating the next generation. His novel invention of well-intentioned intervention is commonly known as a “529 college savings plan.”

What Is a 529 College Savings Plan?

These specialized savings accounts are named after common statutory ancestor 26 U.S.C. 529 of the Internal Revenue Code. Although spawned from federal legislation, these educational funding programs are administered by state agencies and individual institutions of higher learning. Specifics vary somewhat, but the common theme of all 529 savings schemes is maximizing the value of present deposits toward future college costs.

Dual Paths to Same Destination

Section 529 plans exist in two distinct formats: “prepaid” and “savings.”

  • Prepaid

Contributors in this 529 plan category essentially pay for tomorrow’s tuition with today’s dollars. Thus, long-term investment yield depends entirely on the overall level of tuition inflation. There are two sub-categories of prepaid 529 plans: “state” and “independent.” In state-run prepaid 529 plans, funds are applicable toward attendance costs at specific in-state post-secondary institutions. Independent prepaid 529 plans are administered by private educational institutions and funds are applicable only to future attendance costs at participating private school(s). Funds transferability to non-participating academies is restricted and typically results in partial forfeiture of account balance.

  • Savings

In 529 savings plans, investment yield directly correlates to the performance of underlying securities, most often mutual funds. Initial deposits are generally invested in high-yield asset categories with correspondingly higher risk. As beneficiaries grow closer to high school graduation, investment strategy becomes increasingly conservative. While all 529 savings plans are state-administered, most administrative and accounting functions are usually outsourced to private financial services providers.

Pros

Although some states allow full or partial tax deductibility of 529 plan deposits, federal law doesn’t. Despite this, interest accumulation on deposit principal is tax-deferred and distributions are tax-free. Moreover, as depositors retain account ownership, they may withdraw funds upon demand, subject to full taxation and an additional 10-percent penalty for “non-qualified” withdrawals.

Although reclaimable at any time, 529 savings funds are excluded from donors’ estates for tax purposes. This makes these educational funding tools suitable to serve double duty as estate planning devices. Contributors enjoy tax exemption without relinquishing ownership or control of a valuable asset.

Virtual exclusion from financial aid eligibility calculations is an especially valuable feature. No more than 5.64% of gross balance in parent-owned 529 plans may be included in financial award calculations. Finally, beneficiary substitution is freely available without penalty at any time.

Cons

Limitation of allowable investment asset categories is the main drawback of 529 plans. Two tax-related drawbacks are the fact that IRS regulations currently allow just one tax-free asset exchange or reallocation per annum and all contributions decrease the maximum amount of a one-time estate/gift transfer tax exemption.
Non-parent-owned 529 accounts may decrease the beneficiary’s eligibility for need-based federal financial aid by 50% of fund balance. Grandparents and other generous relatives can circumvent this, however, by assigning account ownership to the beneficiary’s parent(s) or the beneficiary, but retain custodianship.

Prompt Planning Pays

All things considered, 529 college savings plans can be a painless way to provide posterity with a lifelong positive legacy. Begin breaking ground to build a brighter tomorrow for your child by visiting the College Savings Plan Network (“CSPN”) official website at http://www.collegesavings.org/index.aspx.

CSPN’s site features many helpful tools such as a side-by-side comparison of multiple 529 savings plans, contact information for plan administrators in every state, and future account balance estimators. An abundance of educational content to help you choose a plan that best suits your goals and budget is also readily available.

Related: FAFSA Explained – Best Value Schools

Get prepared for your next steps

Use articles and resources to uncover answers to common questions, get guidance on your goals, and learn about applying to schools.


The 25 Most Affordable RN-to-BSN Degree Programs Online for 2021

The 25 Most Affordable RN-to-BSN Degree Programs Online for 2021

March 3, 2021   |   Staff Writers

Published on March 3, 2021 Registered nurses (RNs) are nurses who care for patients in settings like doctors' offices, hospitals, long-term care facilities, and community health clinics. While there are...

Grad School Enrollment Growing Rapidly in U.S.

Grad School Enrollment Growing Rapidly in U.S.

January 13, 2021   |   Staff Writers

By Kate Jellema This year, for the first time, the number of women and men enrolled in graduate schools in the United States topped the three-million mark. That’s up from...

Advertisement BestValueSchools.com is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.

Discover a program that is right for you.

Explore different options for you based on your degree interests.