529 Plans

529 plans are called 529s because the plan is based on Section 529 of the IRS code. 529s were established so that a family can save money for their child to go to college, generally without paying taxes on the growth of the account. Philosophically, they are the equivalent of a retirement account, except that instead of being used for retirement, they are used for post-secondary education.

Two primary types of 529's are prepaid or savings, and of course, there are variations to both. 529 plans while approved by the IRS are managed by the state wherein the child resides. Fortunately all states have either developed a 529 or hired someone to develop one for them. Post secondary education institutions can offer the prepaid plan but by law, are not allowed offer the savings plan. Any institution which accepts Title IV funds is eligible to be included as a recipient of funds from a 529 plan.

If you are the parent of a potentially college bound student there are several reasons why you should be interested in 529 plans. First, the growth of the 529 investment may be tax free, saving you a significant amount of money. Additionally, many states have passed legislation allowing for the state income tax to be waived on the growth as well. Some states also allow a state income tax deduction for contributions to 529 Plans.

Another advantage is that you maintain ownership and control of the account, not your child. Thus, you are able to determine when funds come out of the account and to whom those funds are distributed. 529 Plan enrollment is relatively easy, once a 529 fund manager is chosen (Tuition Funding Solutions Financial can assist with this); you simply enroll and send the funds to the account in the amount and timeframe that you desire.

529s also have no income maximums; everyone is eligible to establish a 529 program. Many state plans allow for well over $250,000 to be contributed to the account. Next, you can even roll over an existing UTMA or UGMA account into a 529 program, under the caveat that whatever growth occurred in the UTMA or UGMA will have to be reported on the child's tax return when it is rolled over. An exception to this rule is the Coverdell Education Savings Account which under current federal law, can be rolled over to a 529 without paying taxes on the growth. If your child decides not to go to any form of education after high school you may withdraw the funds and pay a 10% penalty on the accrued interest, or transfer the future recipient of funds to another 529 beneficiary.

As you have probably guessed by now, setting up the account is not difficult. The ramifications however, of how you handle the account may have immense implications on the future value of the account. Tuition Funding Solutions Financial will review your 529 options with you and assist you in determining if a 529 Plan best fulfills your financial goals and if so, which one is the perfect match for your unique situation.