MONEYSENSE 04.23

Why Is It Called A 529 Plan?

By Ray DiBartolomeo

A 529 plan, also called a Qualified Tuition Program,[1] is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. 529 plans are named after section 529 of the Internal Revenue Code—26 U.S.C. § 529.[2] In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.[3]

Contributions to 529 college savings plans are made with after-tax dollars.[4] Once money is invested in the account, it grows tax-free, and withdrawals from the plans are not taxed when the money is used for qualified educational expenses.[5] A 529 plan can provide a convenient, hands-off way to save for college, but according to the new law 529 plans can be used to fund all K–12 school tuition costs up to $10,000 per year per child.[6] The SECURE Act further expanded the use of 529 plans to cover student loan repayments.[7][8][9][10]

There Are 2 Types Of 529 Plans:

• Prepaid plans which allow one to purchase tuition credits at today’s rates to be used in the future.[11] Therefore, performance is based upon tuition inflation.[12] Prepaid plans may be administered by states or higher education institutions.[13] The prepaid plan allows you to pay for future tuition at current rates, which could mean significant cost savings down the road.[14] Although some states cap the total allowable balance in your account, those limits are relatively generous and range between $235,000 to more than $500,000.[15][16]

• Savings plans which are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds and exchange-traded funds (ETF).[17] Investors can select stocks and bonds via preset investment menus.[18][19] Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.[20]

Advantages And Disadvantages:

The primary drawback of prepaid tuition plans is that they generally apply only to certain community colleges, colleges, and universities within a particular state.[21 ] Unlike 529 savings plans, which can cover a wide range of expenses, including room and board, these plans are generally limited to tuition only.[22] Another benefit associated with 529 Plans is the ability to transfer unused amounts to other qualified members of the beneficiary’s family without incurring any tax penalty.[23] Your 529 account will never expire, even if your child ends up not using it.[24]You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member. [25]

At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.