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The savings account that will allow your children to go to university in the United States. It is better to save for college than to go into debt with a student loan.
From the moment you decide to start a family and have a child, you must consider all the expenses that you are going to have to cover: shelter, food, clothing and education. There are millions of families that are solving this last item at the moment during the first years, but they do not contemplate the high university expenses of the future that they have to resort to a student loan that their son carries during a long period of his professional life. It is best to take advantage of the moment and the childhood of your child to start saving in a 569 plan.
What is a 529 plan?
Introduced to the country in 1996, a 529 plan is a college savings account that is exempt from federal taxes . They got this name because they are designated by Section 529 of the federal tax code. These plans have tax benefits at the state level for state residents, which only applies to states that have income tax.
Each state imposes a total contribution limit that is usually between $235,000 and $520,000 per year . The great advantage of this plan is that if you exceed the maximum deduction for each year, it can be carried over to the following years.
These accounts are available to any US citizen or resident alien 18 years of age and older. While opening a 529 plan typically benefits from a child, grandchild, or younger relative, it doesn’t stop anyone from saving for their own higher education costs, as there are no age limits.
Types of 529 Plans
- Prepaid tuition plan. It’s a way to lock in the current cost of tuition instead of assuming a future price, which typically increases each year.
- Savings investment plan. It is the most popular. As its name implies, it is an investment account that generates income and is specifically intended for the studies of the beneficiary.
Prepaid tuition plans have fallen out of favor with Americans because, although it locks in the state’s public college, university, and tuition fees, it does not pay for room, board, books, or other educational necessities that the beneficiary must pay, are covered separately.
How and where you can use 529 plan funds
According to US News, for college savings plans, eligible institutions include most accredited universities and graduate schools, including trade and professional schools. In addition , the contributions are applied to the diversity of educational expenses, among which tuition, books, accommodation and food stand out.
You must be careful of the use that is given to these funds. Approved transactions are called qualified withdrawals and vary from plan to plan. But if the contributions go to other types of unauthorized purchases, then the tax deductions will be recouped and you may even incur additional financial penalties.
Investment Types of a 529 Plan
In the vast majority, the money is invested in mutual or exchange-traded funds managed by financial companies like BlackRock or iShares. There are two investment options that work according to your needs and expectations.
- Investment based on age. Your assets are automatically adjusted to make the investment less risky as the student approaches college age. That is, they start with a higher allocation to stocks and will gradually shift toward cash or bonds over time.
- Static investment option. You have an investment fund or group of funds that maintains the same allocations throughout the entire time of the plan.
Although the above options are the most common, you can agree with your agent on the plan that best suits your needs and risk tolerance levels.
It is difficult to generalize, but essentially payments for administration and maintenance charges, adviser fees and underlying investment are contemplated.