How 529 College Savings Plan Can Assist with College Expenses
College tuition is one of the biggest expenses you're likely to face in your life. See How 529 College Savings Plan Can Assist with College Expenses.
In fact, the average annual tuition costs for the 2021-22 school year for public, four-year colleges was $10,740 for state residents and $27,560 for out-of-state residents, according to CollegeBoard data. On average, annual room and board costs added $11,950 to the cost of college.
Thankfully, families have the option of saving for college tuition through the use of a 529 plan. These tax-advantaged savings plans can be used to either fund tuition costs or contribute to an investment account that can go toward other education expenses. Best of all? Anyone can start a 529 plan for themselves or a designated beneficiary.
While the contributions to a 529 plan are not tax-deductible, the withdrawals are, as long as they're used for qualified education expenses, such as tuition, books, or room and board costs.
The following is a primer on how 529 plans can assist with planning for college expenses:
How Does a 529 Plan Work?
There are two main types of 529 plans, including prepaid tuition and education savings plans. All 529 plans are administered by your state government, and most states allow you to choose from both types of plans. However, some states only offer one option.
Keep in mind that you're not limited to the 529 plan that is offered by your state. Instead, you can select a 529 plan from another state if it has better benefits or if you're looking for certain features.
Prepaid Tuition 529 Plan
A prepaid tuition 529 plan allows you to lock in the tuition cost for a specific university or college years in advance. As money is deposited into the account, credits are granted that can later be applied toward future tuition at the institution. Indeed, this type of plan is great for someone who knows where their child or the beneficiary of the plan will attend school. However, if the beneficiary decides to go to another school, the money may be withdrawn for tuition, but taxes may apply.
Education Savings 529 Plan
Meantime, an education savings 529 plan is a much more flexible option that allows beneficiaries to use the funds saved for any college or university. Deposits made into 529 accounts are invested in certain portfolios, such as mutual funds, ETFs, or bank products. Over time, the balance of the account grows depending on investment performance. While education savings 529 plans don't lock in tuition rates, they can be used for just about any purpose related to education, including tuition, room and board, books, or computers.
What Are the Benefits of 529 Plans?
A 529 plan is an excellent way to get on top of college expenses in a child’s early years. The earlier you sign up for a 529 plan, the more time you have to grow the account.
Additionally, there are no national yearly contribution limits to these plans, but some states have put limits in place. However, with the limits being rather high ($200,000 or more), you’re unlikely to be impacted by them.
If you have extended family or friends who are interested in contributing to a 529 plan, they can do so freely. They will only be charged a gift tax if their contribution exceeds $16,000 in 2022.
Finally, the individual who opens the 529 plan retains ownership of the account. If your child decides not to attend college in the future, you can change the beneficiary to someone else, or you may withdraw the funds for other purposes. If you do choose to withdraw the money for a purpose outside of education, a withdrawal penalty will apply. You can also check out the best way for college students to make money while in school.
