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5 529 Plan Rules to Know

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A father plays with his son after learning 529 plan rules and establishing a savings plan

With college costs increasing at staggering amounts, parents or grandparents of young children may seek ways to save for education expenses.

Since 1996, the government has offered potential benefits to those who contribute to qualified tuition programs. One common qualified tuition program is known as a 529 college savings plan. If you're considering this option, it may be helpful to know some of the 529 plan rules and options.

1. Plans Are Administered by States

While the name "529 plan" comes from section 529 of the Internal Revenue Code, these plans are offered and administered by individual states. Each state has its own 529 plan rules and state-level tax treatment.

You can invest in a plan that's sponsored by a state you don't live in, but it's important to review the details, especially since many state plans offer advantages to in-state residents. The College Savings Plan Network, created by the National Association of State Treasurers, has a tool to compare various state plans.

2. There Are Two Kinds of Plans

In general, there are two different kinds of 529 plans: prepaid tuition plans and savings plans. Prepaid tuition plans allow you to purchase future college tuition credits at current rates. The money can be used to pay for tuition at eligible state colleges or universities.

529 plans help you save for qualified education expenses. You can use the money to pay for college tuition and other qualified expenses, and you can also withdraw up to $10,000 a year per beneficiary for qualified K-12 expenses. 529 savings plans allow for tax-deferred growth of your investment and tax-free use of the money if it's used for qualified expenses, which include tuition, fees, books and other supplies.

If money is taken from a 529 savings account for anything other than qualified expenses, you may be required to pay a 10% tax penalty on top of the income tax you will pay on any gains.

3. If Your Child Doesn't Need the Money for College, You May Not Lose Your Investment

What happens if, after saving all this money, you find out your child doesn't want to go to college, or they receive a full scholarship and don't need the money?

There are a few options that may be available if your child doesn't need the money you've invested for college. First, if your child is interested in attending a trade school, money from a 529 plan can be used for eligible institutions. If you have other children, you could also change the beneficiary and use the money to help pay for another child's education. Lastly, you could take a non-qualified withdrawal and pay the taxes and penalties.

4. Savings Plans Often Have Investment Portfolios to Pick From

When you enroll in a 529 plan, you'll likely have to choose one of the investment portfolios that's offered by the plan. Two of the common options that are typically offered by most plans are age-based portfolios and risk-based portfolios.

Age-based portfolios are typically made up of investments that become more conservative as the beneficiary gets older and closer to college. Risk-based funds typically focus on achieving a specific investment objective and stay the same regardless of the beneficiary's age.

Your plan will likely offer other portfolios and investment options, so you may want to speak to a registered representative for more information.

5. Some Plans May Offer Extra Financial Benefits

According to the College Savings Plan Network, 529 plans may offer a variety of additional benefits. Here are a few examples:

  • Minimum monthly contributions may be as low as $15 in some states.
  • Maximum contribution limits are as high as $300,000 or more for some plans.
  • Plan assets may be protected from bankruptcy.

Keep in mind that these benefits vary by state and may not be available in the plan you choose. For more information, please see the College Savings Plan Network.

529 plans can offer a number of potential benefits when saving for college. To learn more about how they work and what may be right for you, consider speaking with a registered representative.

Investors should carefully consider investment objectives, risks, charges and expenses before investing in a 529 savings plan. This and other important information is contained in the Issuers Program Description which can be obtained from a financial professional. The Program Description should be read carefully before investing.

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