Back-to-School Reminder: Start a 529 Plan

What to know about a 529 college plan for any child in your family.

By
Kelly Trageser, Credit.com
September 14, 2013, 1:07 PM ET
2 min read

Sept. 14, 2013 — -- Notebooks, check. Pencil cases, check. Backpacks, check. 529 plan, whoops, forgot that one.

September is a good time to think about all things educational. For those who have 529 plans, increase the monthly contribution. The little extra you contribute will surely add up over the years. For those of you who don't, or are not familiar with this type of savings vehicle, here is a friendly reminder to start a 529 plan.

What's a Bad Credit Score?

A 529 plan is a tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary. A 529 plan is the most flexible method with tremendous advantages for long-term college saving. Here are some of the most important things to know:

  • The primary benefit of a 529 plan is that the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax.
  • With this plan, the donor maintains control of the account, yet the account is out of the owner's estate. With few exceptions, the named beneficiary has no rights to the funds.
  • Anyone can contribute to the account.
  • Unlike other college funding methods, such as the Coverdell Education Savings Account and the Roth IRA, there are no income limitations that make you ineligible for an account.
  • Most states have no age limit for when the money has to be used. If the child gets a scholarship, any unused money can be withdrawn without paying a penalty (just the tax).
  • If funds are not used for the intended child, the funds can be used for another beneficiary who is a family member of the original beneficiary. If the money is ultimately not used for eligible education purposes, any growth is taxed as ordinary income, and subject to a 10 percent penalty.
  • A 529 plan can provide a very easy hands-off way to save for college by completing a simple enrollment form and signing up for automatic deposits. The ongoing investment of the account is handled by the plan, not by the donor. To find a 529 plan that is suitable, go to Savingforcollege.com to compare and contrast various 529 plans or contact a Certified Financial Planner™ to help you make a good decision.

    • 4 Ways to Pay Off Your Student Loans Faster

    The Impact of a 529 Plan

    Many parents may be concerned about how having a 529 plan will impact their chances of financial aid. A 529 account owned by a parent for a dependent student is reported on the Free Application for Federal Student Aid (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64 percent rate in determining the student's Expected Family Contribution (EFC).

    The Ultimate Credit FAQ

    Parents may also wonder if they should save for retirement or save for college. Ideally, once your emergency fund is fully funded, you should aim to set aside enough money for tuition contribution goals and retirement savings simultaneously, if that's possible. If not, it's critical for parents to secure their emergency fund, then their retirement finances first before funding children's education expenses.

    This work is the opinion of the columnist and in no way reflects the opinion of ABC News.