The 529 Plan: What You Need to Know

If you have a child who is preparing to go to college, or if you’re planning on heading to college yourself, there’s a good chance that you have heard of the 529 plan, also known as the qualified tuition program. This plan basically offers a way for soon to be students or the parents of soon to be students to start saving money for college. It gets its “529” nickname because of the section of tax code that explains this option.   

Basically, this is a plan that you can contribute to in order to save up for college costs- a smart move since these expenses are always increasing. Unfortunately, you won’t get a federal deduction for the contributions that you make to the plan, but you often get a state tax deduction, providing you invest in the plan that is relevant to the state in which you reside.

Another nice advantage of this plan is that as long as you use the money saved in it for qualified educational expenses, such as room, board, tuition, mandatory fees, and other required items, any earnings you receive will not be taxed.

If you’re ready to get these great advantages, then all you have to do is follow the steps, preferably with the help of a knowledgeable financial adviser, to set up a 529 plan. If you’re the one going to school, you can name yourself as the beneficiary, but if it’s your child who is to be the beneficiary, you can name him or her as such and yourself as the custodian.

Depending on where you live, you may also have the option of setting the plan up as a savings plan or a prepaid tuition plan. What you should and can do, however, will vary based on where you live and your goals for setting up the plan. For this reason and to ensure that your plan works out exactly as you hope, it’s always smart to seek advice from a financial adviser in your state. If you can do that, there is no reason that you can’t enjoy great benefits and help from your 529 plan.

Using Your 529 Savings

People who plan successfully for their children’s educations will often have a nice amount of funds available in their 529 plans. When the time comes, however, these same people are often quite confused about how best to access and use these funds. Fortunately, it’s not all that difficult, at least if you know a few basic tips and rules related to using the 529.  

Where to Withdraw

First things first, you may be wondering, if you have multiple 529 plans, which one you should withdraw from first. Really, even though people stress a lot over where to withdraw the money, it really doesn’t matter all that much, as long as all of the funds will ultimately be used for college.

With that said, though, you may want to withdraw from the accounts with the greatest earnings. The reason for this is that those earnings won’t be taxed providing you use them for college related costs. From there, you can choose to use the other accounts only as needed, and you typically won’t have as many earnings to report on your tax return.

When You’ve Withdrawn Too Much…

Another common concern people often have with their 529 plans is if they accidentally withdraw more than the qualified educational expenses they pay. Try not to let this happen to you because you’ll end up paying taxes plus penalties on the excess you’ve withdrawn.

You also can’t put the money back into the plan if you make this dire mistake. If it’s too late and you’ve already made this “goof,” there is SOMETHING you can do though. Just choose to use the excess on other qualified expenses before the year is up. 

As you can see, there are plenty of questions and concerns that people have surrounding their 529 plans. If you run into any others, remember you can (and should!) always ask a qualified financial adviser or accountant for advice.