A 529 plan is one option for saving money for college.
A 529 plan, also known as a qualified tuition plan, is just one way for parents to set aside money to fund their child's college education while also potentially earning some significant tax advantages. In addition to IRS guidelines governing 529 plans and taxation rules, all 50 states have their own individual requirements regarding these college savings plans.
Eligibility
There are no restrictions on who may contribute to a 529 plan and there is no age restriction on who may be named a beneficiary of the plan. Funds are held in a custodial account and may potentially impact financial aid eligibility when the student enrolls in college. All 50 states offer 529 plans and residency is not required to participate in any particular state's plan. Funds held in a 529 plan may be used at any college or university, regardless of state.
Income and Contribution Limits
Unlike other education savings account, the IRS does not place a limit on income for those contributing to 529 plans. Contribution limits are mandated by each state, and many states offer contribution limits in excess of $200,000. Certain states also allow residents a tax deduction for contributions made to their state's plan.
Qualified Withdrawals
The IRS allows withdrawals for qualified education expenses at eligible educational institutions, meaning any college, university, vocational or technical school or any other postsecondary institution that is eligible to participate in federal student aid programs. Qualified expenses include tuition, fees, books, supplies, equipment, computers, computer software, Internet access, expenses related to special needs and qualified room and board expenses for students who are enrolled at least half-time.
Account Changes
The IRS allows account owners to change their investment tracks a maximum of twice per year. You're also allowed to transfer funds from one 529 plan to another once per year.
Withdrawal Penalties
All withdrawals from a 529 plan for qualified education expenses are not subject to a federal tax penalty. Any withdrawals made in excess of the necessary amount for education expenses or for purposes other than education funding are subject to a 10 percent withdrawal penalty. The 10 percent penalty does not apply if the designated beneficiary dies, becomes disabled or if the withdrawal was included as income due to the beneficiary receiving additional tax-free education funding.
Tags: education expenses, college university, education funding, from plan, Funds held