The 529 college savings plan is an investment option that is available to the residents in the United States. This plan was incorporated in the United States to facilitate people with a method in which they would be able to save money for their education costs. As most people are aware, education is a very costly affair and without adequate financing solutions, it probably will not be possible for a person to opt for higher education.
Why 529 College Savings Plan?
There are not too many investment opportunities that allow a person to save up for college education. For retirement, on the other hand, there are several options that are available from the government like the IRA plans. However, for college education, the most reliable options are perhaps the 529 college savings plan and government grants for education. While it may not be possible for most people to avail government grants for education, the 529 plan is available to everyone. However, the decision to invest on college entirely rests upon the individuals. In simpler words, everyone is eligible to invest in the 529 plans.
529 Plan Rules
As with all other types of investments, there are certain rules that govern the operation of 529 plans. The most common 529 plan rules are the ones that deal with the 529 contribution limits, the withdrawal rules and the penalties that an individual will have to bear if the amount if not used ‘only’ for eligible education expenses.
The contribution for the 529 plan can start as low as $200 or it can be as high as $20,000 or more. It depends on the plan that is taken by the individual and the estimated expenses that may be incurred in the future. However, there are limits as to how much an individual may contribute to the account. This limit only applies on the total amount of the fund in the account. For example, if an individual has a total contributing limit of $100,000 and he or she has contributed $80,000 and the account has earned an additional $20,000, then the individual may not make anymore contributions to the account as it has reached the ‘maximum’ contribution capacity.
The rules governing the withdrawals of the 529 plan hold that an individual may only withdraw the amount that is required for the purpose of the higher education needs. If the amount is used for any other purpose, then this amount may attract a penalty from the federal government.
Advantages of the 529 Savings Plan
One of the primary advantages that the 529 savings plan offers is the 529 tax deduction advantage. The contribution amount can be deducted from the income tax liability of the contributor, although the deduction is not available from the federal tax liability. Another advantage that the 529 college savings plans offer is the fact that these plans usually earn more interest than the traditional savings account rates. An added advantage is the fact that the fund in the 529 plan account grows tax deferred for as long as the money is left in the account.