It's never too early or too late to start saving; the important point is to put a plan in place. Starting a 529 plan early and adding to it regularly can make the difference between building a college nest egg and suddenly having to find the money to pay a large bill when your child graduates high school and is accepted to college.1
Once you've decided to save for college, you'll need a plan of action. One of the most flexible, tax-advantaged, and easy ways to save is a 529 plan.
If you're considering investing in a 529 plan, make sure that you read plan's offering materials carefully to make sure that it will meet your - and your student's - needs.
What is a 529 plan?
A 529 college savings plan is a tax-advantaged program created to help families like yours save for a child's future education expenses. The name "529" comes from the Internal Revenue Code section that specifies the plans' tax advantages.
Characteristics of 529 college savings plans
- Most 529 plans are sponsored by a state; in fact, many offer a state tax incentive or other benefits to resident taxpayers who enroll in their plan.
- You can generally enroll in any 529 plan regardless of where you live in the U.S. and regardless of where the student you're saving for - the "beneficiary"- lives.2
- Regardless of the state whose plan you select, a student can attend any eligible school in the country (and some abroad, too).3
- When the student is ready for school, the account owner can withdraw the assets, tax-free, for qualified higher education expenses: tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance, and certain room and board costs.4
- Some 529 plans are available direct to the public ("direct-sold" plans); others are available only through financial advisors ("advisor-sold" plans).
Prepaid plans
Some states offer a "prepaid" plan that lets you pay for college at today's current prices to be used in the future.
- The costs of prepaid plans vary, depending on the age of the child and the particular plan.
- There are several different types of prepaid plans, some of which are geared toward state colleges and in-state residents.
But a 529 plan is more than just an account for putting away money for college. It is designed to offer a number of benefits as incentives for saving.
1 A plan of regular investment cannot assure a profit or protect against a loss in a declining market.
2 You should consider before investing whether your or the beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
3 A few 529 plans (like certain prepaid plans) may have residency requirements; be sure to check with the plan before enrolling.
4 Earnings on non-qualified withdrawals are subject to federal income tax and may be subject to a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.
