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How a 529 Plan Can Make a Difference

Written by Alex Resetar | Jan 2, 2019 10:00:22 AM

In the next 20 years, college tuition costs are likely to triple.

That’s a daunting statistic. And one you can be prepared for with a 529 Plan.

What is a 529 Plan?

It’s a college savings account exempt from federal taxes. And in 2018, the plan also became eligible to use for private elementary and high school.

The Parameters

529 Plans have a maximum lifetime contribution limit, which varies by state. In Pennsylvania, the total limit is $511,758.

On an annual basis, up to $15,000 of tax-deferred dollars can be deposited into a 529 account, or up to $30,000 if you’re a married couple filing jointly. And if the maximum deduction is surpassed within a calendar year, the deduction can roll into subsequent years.

On an annual basis, up to $10,000 can be withdrawn for qualified K-12 tuition expenses. College-related withdrawals are not capped, so long as they are for qualified expenses such as tuition, books, and room and board (if a student is enrolled at least half time).

Each 529 Plan can be opened by only one owner, but anyone can make contributions. Each plan can have only one beneficiary, but that beneficiary can be any age. You can even open a 529 for your own college expenses!

What You Need to Know

There are two main types of 529 plans: A Prepaid Tuition Plan or a College Savings Investment Plan.

A Prepaid Tuition Plan locks in the current costs of tuition in place of future prices. These may only be applied to in-state public colleges and universities and are only applicable to tuition – no related college expenses such as room and board or books.

A College Savings Investment Plan includes a much broader swath of qualified expenses, including college expenses at professional, trade schools, community, public, and private schools. Even international school expenses can be included, as long as the school accepts students who receive U.S. federal financial aid. Related expenses include school supplies, computers and related equipment, and special needs equipment just for college.

The Investments

Most funds contributed will be invested in large mutual funds run by well-respected companies such as Vanguard and BlackRock.

You can choose to have a 529 Plan that adjusts the investment portfolio with age. So depending on the age of the beneficiary, invested money will move from riskier investments, with more volatile stocks, to less risky investments, such as bonds, as the student ages.

The second approach is a static choice, holding the plan funds in a group of investments that maintain the same allocations over time.

Within those approaches, you still have control over the investments and can make changes. Many 529 accounts offer options more aligned with a regular savings plan – insurance-backed guaranteed funds or money market funds. These types of investments won’t keep pace with inflation over time, however.

Other Considerations

A 529 account comes with fees – and there can be more of them if the account is managed by a financial advisor. The account itself will probably come with program management and maintenance charges, as well as fees tied to the investments themselves.

If you’re looking to make sure your child or even you yourself has a solid base for gaining an education without taking on a large amount of debt, it’s a good time to look into a 529 Plan. And don’t forget, 529 Plans aren’t your only options for paying for education. To learn more about other options to cover the cost of education at any stage of life, you can talk to an expert  at AmeriChoice to discover what is available to our valued members.