The cost of college tuition fee has been steadily increasing since the year 2010. Be it K-12 or graduation, the cost of education is so high that it can weigh you down and put you in serious debt. But, that does not mean you cannot provide proper education to your kids. Applying for various government programs designed to help you save and pay for your kid’s education will put you in a better financial position than others who continue to ignore such benefits.
A 529 is a savings plan designed to help you pay for your kid’s education. Commonly used by parents for their children’s education, this plan can also be used for your spouse or yourself. As a plan holder, you will be in total control of the account and can decide what to do with the money. The beneficiary cannot withdraw or use the money for personal use. In fact, they have no control over the account.
Benefits of a 529 plan
1. This plan also pays for educational expenses other than the tuition fee.
2. You can change the beneficiary anytime you want. The new beneficiary has to be one of your family members.
3. No minimum limit on how much you can contribute. Although there is a maximum limit decided by the state.
4. A 529 plan pays for both K-12 and college education.
5. The earnings from a 529 plan are tax deductible.
Types of 529 plan
1) College savings plan
Under this plan, you can contribute money up to a certain limit set by your state. Usually, the limit is equal to the average tuition fee of the colleges. You can also connect your savings account to mutual funds and earn higher interest rates but there is a risk of losing the money before the beneficiary begins there education.
2) Prepaid tuition plan
Under a prepaid tuition plan, the account holder can pay the money needed for beneficiaries education well in advance. You don’t necessarily have to pay the total expenses for the college but a partial payment is also allowed. However, this plan is only applicable to certain pre-defined educational institutes.
How to use a 529 plan to pay for college?
To use a 529 plan to pay for college, you have several options available based on your needs. You can fill up the withdrawal form on the 529 websites to transfer the funds either directly to the college or beneficiary. In some cases, people also transfer the amount to themselves. Even if the beneficiary receives a scholarship, you can withdraw the money. In that case, you may have to pay a penalty as you will be using the money for non-educational purposes.
A 529 plan is that it is tax-advantaged. Which means if you use the money deposited in it the way it is supposed to, you will not have to pay any taxes on the earnings. Also, each state has numerous 529 plans and all have different terms and conditions. So, make sure you choose the right 529 plan to pay for college.