There are two types of 529 plans—college savings plans and prepaid tuition plans. Both offer tax-advantages for families saving for college (their name comes from the section of federal tax code that governs them). Every state offers at least one of these types of plans. Some states offer both, and a consortium of private colleges also offers a prepaid tuition plan.
With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks and computers.
Not Just for Children
If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes, and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.
Not Limited to In-State Public Colleges or State Residents
Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some overseas educational institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions. You can live in Ohio, contribute to a plan in Maine, and send your child to college in California. However, if your state offers state tax advantages to residents who participate in the local plan, you’ll miss out if you choose another state’s 529 plan.
Covered Education Expenses
College savings plans typically cover all “qualified education expenses” at eligible colleges, universities and other post-secondary institutions, including:
Books and supplies
Equipment required by school
Room and board
When you invest in a college savings plan, you pay money into an investment account on behalf of a designated beneficiary. Contributions can vary and are only limited by the maximum and minimum contributions limits set by most plans. Maximum contribution amounts differ from state to state, but the majority of states offering college savings plans allow contributions of $200,000 or more.
To further increase the amount of contributions you can make, you can open a second college savings plan in another state. Currently, the IRS only requires that contributions for one child cannot be more than the amount necessary for the qualified higher education expenses of that child. So if you want your child to go to an expensive college and graduate school, one option you have is to open more than one college savings plan.
Most states also offer very flexible minimum contribution limits. Many require a $250 initial contribution with subsequent contributions of as little as $50. These minimum contribution amounts can be reduced even further in many states if you make contributions through payroll deductions or automatic transfers from a bank account.
Plans typically give you a number of investment options that allow you to invest in various mutual fund and exchange-traded fund portfolios. Some college savings plans offer age-based fund portfolios that seek higher returns when the child is younger—and you potentially have more time to ride out short-term market fluctuations. As the child grows older, the investment objective usually shifts more toward preserving the money you saved while keeping up with inflation.
Many states also offer non-age-based investment options, allowing you to select portfolios with “conservative,” “moderate” and “aggressive” asset allocations. Some states also offer investment options that allow you to invest in certificates of deposits whose interest rates are linked to an index that measures the average cost of college tuition.
The IRS allows you to change your college savings plan investment options once per calendar year, and when you change the designated beneficiary.
Investing in college savings plans comes with some risk. Unlike prepaid tuition plans, they don’t lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money or your investment may not grow enough to pay for college.