529- Sounds Like A Plan
“Sounds like a plan”. My cousin, who came right from Port au Prince, Haiti, learned this phrase from his seventh-grade teacher, upon arriving to the United States. And as you embark upon getting your child’s educational needs in perspective, you should definitely consider a 529 Plan to help you fund your child’s college education.What is a 529 Plan, you may ask? It's an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. The reason that these are quickly gaining in popularity is because they offer the “investor” a great opportunity to save for college with great tax benefits.
First of all, while the amount that you contribute may not be tax deductible, the amount you contribute can grow tax-deferred, much like a Roth IRA. Each state treats 529 Plans differently so, it’s important to find out how that can benefit you as well. Secondly, the process is fairly simple. You simply complete an enrollment form, make your contributions to the plan and the 529 Plan Administrator handles it from there. Unless you take out funds from the plan, there isn’t even any statement that you receive at the end of the year. It’s a very hands-off kind of arrangement- in a good way.
Third, what most parents, especially like about the 529 plan is that, you as the donor stay in control of the funds. So, let’s say you set up this plan for your son or daughter and they suddenly decide that they no longer want to attend college, but want to hang out in the rain forests of Brazil to find himself or herself. You are not without a remedy. With 529 Plans, donors can decide where funds are directed. And don’t think that 529 Plans are limited to kids under the age of 23, either. This great strategy is available to anyone with no age restrictions, or income restrictions.
One thing you may want to be mindful of, is that if distributions are being made on non-qualified expenses, there will be income tax on the gains (whatever was earned on the contributions made) as well as a 10% penalty. There are a couple exceptions to the rule, such as the beneficiary dying prematurely or if the beneficiary receives a scholarship. Speaking of scholarships, one of the concerns of many people is whether this money that is growing in the 529 Plan would hinder the chances for receiving financial aid. The simple answer to that is- kind of. This is determined by how the account has grown, and who actually “owns” the account (not the beneficiary).
All in all, make sure to check with your particular state to see how the 529 is performing, and know that you are not confined to using the state 529 plan where you reside. Do your due diligence and maximize your benefit, and it just may help to make college funding a little bit easier.