Opening a 529 Plan? 3 Basic Steps to Consider Before You Do

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InvestmentHere are some things you need to do before opening a 529 plan.

Basically, a 529 plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Named after Section 529 of the Internal Revenue Code, these plans can be used to meet the costs of accredited colleges and universities around the country and provides special tax benefits to plan participants.

529 Plans 101: Understanding the Basics
As mentioned earlier, 529 plans are designed to help families save for college. Nearly every state has a 529 plan available (some states have several) but the features and benefits may differ from state to state. There are several benefits to opening a 529 plan. Here are some of them.

  • It provides federal and state tax benefits. While contributions are not deductible on your federal tax returns, the money you put into the plan grows tax-deferred. In addition, you don’t need to pay taxes when you take them out to pay for college-related expenses. You may also get some tax breaks from your state by opening and maintaining a 529 plan.
  • It is flexible and easy to maintain. You can open accounts for any number of people regardless of their relationship to you, open more than one account per person, change to a different option every year or rollover your account to a different state’s program if you like. And since your account will be directly managed by the plan, you can step back and relax after deciding which plan to use, filling out the appropriate enrolment form and making your contribution.
  • Donor retains control. In most cases, the donor retains full control over the fund, and has the full authority to make withdrawals. However, non-qualified withdrawals will be subject to income tax and an additional 10% penalty tax.  
  • There are no age restrictions and/or income limitations. Some states allow up to $300,000 per beneficiary. There are also no age restrictions to qualify for the plan.

Steps in Opening a 529 Plan
If you are seriously thinking about opening a 529 plan, here are some steps that you need to consider before making a decision.

Check before you invest. Before choosing a plan, make sure you go over the plan’s official statement carefully to learn more about the investment objectives, charges, expenses and risks of investing in the plan. Also consider whether your home state or your beneficiary’s home state offers any state tax or other benefits.

Consider your budget. While setting an automatic monthly deposit into your 529 plan can make things a lot easier, you need to consider your monthly budget when determining the amount you can realistically save each and every month.

Choose an uncomplicated plan. To get the best possible results, choose a plan that offers investment options that fits your needs. It is generally advisable to pick a plan that offers a limited number of investment choices, especially if you are pressed for time.