Operated by a state or educational institution, a 529 plan (qualified tuition plan) is an educational plan designed to aid families in setting aside money for future college expenses. It offers tax-advantage to plan holders that’s why it’s a great college assurance plan. It derived its name from Section 529 of the Internal Revenue Code. This plan can be used to cover the costs of the college of your choice given that the institution you’re opting to be in is eligible to your 529 plan.
529 plans may differ by state. At present, every state has at least one 529 plan and the structure of the plan will depend on the state’s decision. The state where your plan has been established will normally not affect on the process of choosing your college.
You can choose between two types of 529 plans: college savings plan and pre-paid tuition plans. Some private colleges and universities sponsor a pre-paid tuition plan while all the 50 states and the District of Columbia sponsor at least one type.
Pre-Paid Tuition Plans
This type of 529 plan allows account holders to purchase units or credits from universities and colleges covered by the plan. Sometimes this could also include room and board. These are usually state-sponsored and requires minimum residency.
Being sponsored by the government, you can choose from investments guaranteed by the state.
College Savings Plans
529 college savings plan is like an IRA savings account or a 401(k). The college saver (account holder) will choose a specific investment which the college savings plan will invest on his or her behalf. This plan will be established by individuals for their beneficiaries. Like the name implies, withdrawals out of this plan can be used for college education funding.
529 Contribution Limits
The limits to contributions made by account holders for their beneficiaries may vary with each state. Only the necessary amount needed to fund your college education will normally be the limit for 529 contributions. These limits are set with a lifetime basis. All contributions will be treated as a gift. A maximum amount of $12,000 for annual contributions can be done without incurring federal taxes. You can also contribute a lump sum amount of $60,000 ($120,000 for married couples) that would cover five years. But take note that within those five years, additional contributions will absolutely be not permitted.
In individual Retirement Accounts we take into consideration the rates that IRA companies offer us. In banks, we look into savings account rates. When it comes to 529 plans there will be many things to consider also. So seeking an investment advice will be a very wise move for an individual opting to open a 529 plan. Investments will have a very great impact with your plan because this will be the very vessel for the growth of your contributions.
You might want to learn about 401(k), Individual Retirement Accounts and Individual Savings Accounts because these are great investments that provide unique tax advantages to individuals, speeding up the money saving process.