The rising costs of college make planning for tuition a high financial priority for many people. The government offers 529 plans to assist people in saving for future college expenses for themselves or their family members. These plans offer tax advantages, often on both the state and federal levels. With 529 plans, the government considers tuition, room and board, mandatory fees and required supplies to be qualified expenses.
Instructions
1. When explaining 529 plans, define them as college savings plans rather than prepaid tuition plans. Prepaid plans allow you to lock in a certain price for future education costs, while 529 plans provide special accounts for saving for future college expenses.
2. Explain the tax benefits of 529 plans. Money in the account grows free from federal taxes and most state taxes. Explain that as long as you use the money for qualified college expenses, you can take the money out tax-free. Some states also allow you to deduct your contributions on your state income taxes.
3. Explain that a 529 plan is not a single investment. Money in a 529 can be invested in various ways, depending on the options that are offered by the plan, such as stock or bond mutual funds. Point out that some are conservative or aggressive in their investment approach. Also note that the rates of return will vary depending on the investment's performance, and some investments could drop in value.
4. Explain that 529 plans have limits as to how much can be held in the account at any time. These limits vary by state, but according to the Securities and Exchanges Commission, most states have limits above $200,000. Point out that after your account reaches this limit, you cannot contribute any more.
5. Warn about the 10 percent penalty that must be paid on money withdrawn from the account that is not used for qualified educational expenses. For example, if you withdraw $3,000 to pay for a vacation, you would have to pay a $300 penalty.
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