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529 Plans
529 Plans help you prepare for future education expenses. There are three types: 529 College Savings Plans, 529 Pre-paid Tuition Plans, and Independent 529 Plans. The first two plans are managed at the state level, so some details about the plans in your area may be unique to your state. The Independent 529 plan is a national plan managed by member colleges. Find out about 529 plans offered in your state.
| 529 College Savings Plan | Prepaid tuition Plan | The Independent 529 Plan |
This plan earns money through investments made by a bank or financial institution.
Am I eligible?
Anyone can open a 529 College Savings account.
How much can I put in?
This varies by state, but maximum limits are usually high.
What can I use the money for?
You can use the funds at any college or university for expenses such as tuition, fees, room and board, and books.
Some important things to think about before setting up a 529 College Savings Plan:
- You’ll get Federal tax breaks (and most states offer tax breaks, too) if you use the money according to the rules. There are penalty fees and tax problems if you don't use the funds for college.
- As with any investment, there are risks. You may not always make a profit.
- The student’s eligibility for need-based financial aid will go down slightly.
- There are fees you need to pay the account manager who is taking care of your plan. Sometimes these fees are as much as 1 to 2 percent of what your account earns in a year.
This is a true savings account where the interest rate matches the increasing rates of tuition. When your child is ready to go to college, you receive the dollar value of what the tuition costs at that time.
Am I eligible?
Yes, anyone can open a 529 Prepaid Tuition Plan.
How much can I put in?
This varies by plan. Check with your financial institution.
What the money can be used for:
The funds can only be used for public colleges and universities in the state your family lives in. For some plans, the funds can only be used for college tuition and fees. Parents will need to pay for room and board, books and other fees.
Some important things to think about before setting up a 529 Prepaid Tuition Plan:
- The money that you earn from the plan is tax-free as long as it is used for college expenses. In most cases, you can also deduct this amount from your state taxes.
- This plan is a fairly safe investment for parents who know their children will go to college in the future. For those who are unsure, though, this account may not be the best choice. If you want to cancel the plan or get a refund, there are high-cost penalty fees you will need to pay. Your penalty fees depend on the amount in your account and the state you live in. You could also lose the interest you have earned on the account.
- The money you invest in this plan is usually a better investment than a regular savings plan or CD (Certificate of Deposit).
- Funds you earn from the plan can affect the student's future chances for financial aid. The funds are treated like a scholarship, so it reduces your financial need. Learn more about Federal financial aid.
The Independent 529 Plan is like other 529s since it allows you to prepay tuition today that your child can use later for college. This type of plan has no start-up fees, no maintenance fees, and no annual fees. It’s also free from Federal taxes. It differs from state plans, however, because it is set up and managed nationally by participating colleges.
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