College Savings Tips
What to Look for in a 529 Plan
- Performance – Historical performance is not a guarantee of future success but it is an important measure of how well an investment is doing over the long term.
- Fees – lower fees mean more of your dollars are invested for growth. However, fees and performance should be evaluated together, since some plans with higher fees have better-performing investments.
- State tax benefits – Many states provide residents with state income tax benefits for investing in a 529 college savings plan.
529 Plan Basics
A 529 plan is a tax-advantaged savings plan designed to encourage families to save for college. Earnings on 529 investments accumulate tax-free, and distributions are tax-exempt as long as they are applied toward eligible education expenses such as tuition and room and board.
529 plans are named for the section of the federal tax code that governs them. They are most often sponsored by individual states and managed by a mutual fund or other financial services company. The investments underlying a 529 plan typically consist of mutual funds.
Important points about 529 plans:
- Account owners maintain complete control of the account and there are no income limitations.
- Anyone who has reached the age of majority, as specified by their state of residence, may open an account and anyone may contribute to a beneficiary's account (grandparents, aunts, uncles, friends.)
- Account maximums are typically high enough to cover qualified undergraduate, graduate and professional education expenses.
- Account owners may change a beneficiary to another eligible family member or to themselves if the beneficiary does not continue with higher education.
- Distributions must be used for qualified higher education expenses (tuition, fees, room, board, books, equipment and supplies) at any eligible educational institution nationwide including colleges, universities, graduate schools and trade schools.
- Earnings on distributions used for non-qualified expenses will incur taxes plus a 10% penalty and may also have state tax implications.
- No penalties are imposed for withdrawals in the amount of scholarships the beneficiary is granted, if certain conditions are met.
- Account owners may make one investment strategy change per year.