Do you have kids? Well, if any of your kids are planning to go to college in the future, you should learn about 529 plans. 529 plans are specialized investment plans meant to help parents and guardians save up for their children’s future educational expenses. Read this brief guide on 529 plans to see why you should consider opening one.

529 Plans

The first thing that you should know is that there are two types of 529 plans to choose from: prepaid Tuition plans and education Savings plans. These plans will offer different savings benefits and come with different limitations.

The Prepaid Tuition Plan

A prepaid tuition plan is a tax-advantaged investment plan that lets the accountholder put payments toward a participating college’s tuition ahead of time. The main benefit of this plan is that the accountholder makes payments at the current tuition rate — not the estimated rate when the beneficiary will actually attend the college. Since tuition rates rise every single year, this could help the accountholder save money in the long run.

Prepaid tuition plans come with quite a few limitations. For one, most Prepaid Tuition Plans will only cover the costs of tuition. Beneficiaries cannot use the funds for other educational expenses, like dormitory rooms and meal plans. The funds are also not available for earlier steps in their educational journey. So, if your child wants to attend a private high school in their teen years, you cannot use this savings plan to help pay for the school’s tuition. It’s only meant for college tuition.

The majority of prepaid tuition plans are state-sponsored. State-sponsored plans will have residency requirements for applicants. So, if you live outside of the state, you won’t be eligible for the plan. Not all states have prepaid plans available to new applicants. These are some of the states that are continuing to allow applicants to enroll:

• Florida
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Nevada
• Pennsylvania
• Texas
• Washington

If you are not dissuaded by these limitations, this could be the right 529 plan for you and your child.

The Education Savings Plan

The Education Savings Plan is a tax-advantaged investment plan that allows the account holder to save up funds for educational expenses. This version of the 529 plan isn’t as restrictive as a prepaid tuition plan. You can use the savings to cover college tuition and mandatory fees, along with other educational expenses like textbooks, dormitories, meal plans and school supplies. If you plan to enroll your children in a private elementary or high school, you can also use this savings fund to pay for the tuition fees.

The education savings plan can also help beneficiaries pay off student loans they took out to attend college. Due to the SECURE Act (2019), beneficiaries can withdraw up to a maximum of $10,000 from their savings plan to pay down their outstanding student loans. However, students who have taken advantage of this feature of their plan cannot apply for student loan interest deductions in the future. They will no longer be eligible.

You can see how the Education Savings Plan is much more accessible for parents and guardians looking to prepare their kids for college. It has fewer limitations and requirements than a prepaid tuition plan.

529 Contributions

How much can you put in an Education Savings Plan? Many states will have a total contribution limit of over $250,000 for a single beneficiary. This detail will vary state by state. It’s also likely to change by year, as educational costs continue to rise.

Is there a minimum contribution limit? Most accounts will have very low monthly contribution requirements in order to run properly. These minimum contributions can be as low as $15. That’s a feasible goal, even when you’re living on a tight budget.

You don’t have to be the sole contributor to your child’s 529 plan. Other family members can add to the plan to help you boost those education savings. You can ask for gift contributions in lieu of other presents on holidays, birthdays and special occasions. Many plans encourage these types of contributions by offering gift certificates and donation links to student accounts.

Are there contribution limits for gifts? Not exactly. As of 2022, relatives can contribute up to $16,000 per year without being subject to gift taxes. If someone contributes more than that, they will have to pay gift taxes. Surpassing $16,000 doesn’t mean the gifted contribution is ineligible. It will still be accepted.

Eligible Withdrawals

The beneficiary is allowed to make tax-free withdrawals from their 529 plan for qualified education expenses. In the case of education savings plans, qualified education expenses could mean tuition, meal plans, dormitory fees, school supplies, computer equipment, textbooks and student loan repayments. As previously stated, students can only put a total of $10,000 from their 529 plan toward their loan repayments.

Technically, you can withdraw from your 529 plan at any time and use it for non-educational purposes. But this action will come with consequences. You should expect to receive a 10% withdrawal penalty on your earnings portion from the IRS, and you will also pay federal income tax.

More importantly, you will be undermining the purpose of the 529 plan by using the funds for non-educational purposes. There are better methods to cover non-educational expenses than tapping into this specialized savings fund. 

For instance, you can set up an emergency fund to help you pay for urgent, unpredictable expenses that are outside of your budget. You can keep your emergency fund in a standard savings account — or even better, a high-yield savings account. When an emergency expense crops up, you can withdraw the necessary savings from your emergency fund without worrying about withdrawal penalties. This is exactly what this type of savings account is meant for.

Even if you don’t have enough sitting in your emergency fund, you could turn to other payment options than a 529 plan. You could use your credit card to cover the expense and then pay down the balance afterward. Or you could search for options for quick cash loans online and see whether you meet all of the eligibility requirements listed. If you do, you could fill out your loan application in a matter of minutes. You just might get approved for a quick cash loan, which you can then use to cover your emergency expense as soon as possible. Afterward, you can focus on a steady loan repayment plan.

Online loans should only be used for emergency purposes. They’re not meant to cover everyday expenses, including expenses related to your child’s education like textbooks, school supplies and equipment.

Changing Beneficiaries

What if your oldest child decides that college isn’t their goal? Or what if they attend college and get an impressive scholarship? What if you have plenty of savings left over? Don’t worry — you don’t have to give up all of those savings when one of your children doesn’t need them. If you have other children that want to attend college in the future, you can always change the beneficiary on your account. Those funds don’t have to go to waste.

Your new beneficiary must be a qualifying family member. Qualifying family members include your spouse, your children, your stepchildren, your siblings and your extended family. You could even save it for grandchildren — although, this option may not be available to you for a very long time.

What if the new beneficiary already has a 529 plan? In that case, you can transfer the funds you have leftover into their plan.

If you can’t give the savings to a qualified beneficiary, then you still don’t have to lose out on those savings. You can withdraw the funds at your discretion — just know that they will be subjected to a 10% penalty and income tax. Your savings won’t be gone, they’ll just be a little smaller once they’ve been withdrawn.

You should consider saving up for your kid’s college as soon as possible. It doesn’t matter if they’re currently in elementary school and they’re not sure what they want to be when they grow up. College is expensive, and you’ll want to be prepared for the day that they start sending out applications to college programs.

Get an early start. Look into 529 plans and build up your savings now.

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