How to Use a 529 Plan to Pay for the Education of Your Child

With higher education becoming more expensive every year, families are seeking ways to save. One option is a 529 plan. These investment plans allow families to put money away for a child’s future education expenses and gain tax benefits. While you may discuss your options with a financial advisor, an estate planning attorney can explain how a 529 plan can be part of your estate planning goals or how to contribute to a grandchild’s account

A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. They are also referred to as qualified tuition plans and Section 529 plans. Even though these plans are named for Section 529 of the federal tax code, they are administered by the states and the District of Columbia.

A range of investment options are available for 529 plans. The funds in the plans can be used to pay for qualified education expenses, including tuition, fees, room and board, and required books and supplies. The funds can be used at participating accredited colleges, universities, and vocational schools in the United States and even some institutions abroad.

There are two types of 529 plans: education savings and prepaid tuition. Education savings plans work like a typical investment account, allowing families to invest their contributions in mutual funds, exchange-traded funds (ETFs), or other types of investments.

Prepaid tuition plans allow families to purchase credits or units at today’s prices, which can then be used to pay for future college tuition and fees at participating colleges and universities.

When you contribute to a 529 plan, your money is invested and can grow tax-free as long as it’s used for qualified education expenses. Additionally, many states offer tax deductions or credits for contributions to their state-sponsored 529 plans. Withdrawals from the account for non-qualified expenses may be subject to taxes and a 10% penalty.

One of the biggest benefits of 529 plans is their flexibility. There are no income limits for contributions, and anyone can contribute to the account, including grandparents, aunts, uncles, and family friends. Additionally, the account owner can change the account beneficiary at any time, so if one child decides not to go to college, the funds can be used for another child’s education expenses.