7 Questions To Ask When Opening A 529 Plan

MAY 11, 2016
Joseph Chiweshe, MD
Personal Finance, Investing, College Savings 529 plan529 plans are a tax-advantaged plan that is intended to encourage saving for college expenses. Money saved through this vehicle grows tax-deferred and can be withdrawn tax-free. This is a great component to consider as part of any long-term financial planning as it can help with the pressures of future education debt. Although 529 accounts have been around since the 1990s, numerous reports find that by and large people are not familiar with the plans. Another name for 529 plans is “qualified tuition plans.” They generally come in two forms:

Prepaid Tuition Plan
• Allows for the purchase of credits or units to be applied for future tuition and/or some of the other eligible college expenses such as room and board
• State-sponsored and generally have criteria for residency requirements
• Earnings grow tax-deferred and withdrawal is tax-free for eligible college expenses
• Guaranteed or backed by the state
• Age limited
• May charge enrollment and administration fees

College Savings Plan
• Allows for an account holder to open a savings plan intended for the beneficiary to use for all eligible college related expenses
Investment options may include stocks, bonds, and other investments in hopes of keeping pace with inflation
• Earnings grow tax-deferred and withdrawal is tax-free for eligible college expenses
• Subject to market volatility and come with no guarantee that it will increase in value or decrease at a future date
• No age limit

Now that you understand the two types of 529 plans, here is a list of questions you ought to ask before opening one:

• Is the plan through the state or plan sponsor?
• What fees are charged by the plan, and where are those fees going?
• What are your withdrawal restrictions?
• What investment vehicles does the plan utilize?
• Who manages the plan?
• How has the plan performed in the past?
• Are there benefits to using your state’s plan over another?

It is important to be aware that using 529 plans to pay back student loans can be costly, thus it’s best to avoid this use if possible. Existing student loan payments do not qualify as an eligible college expense, so if you use 529 plans to pay your loans, you will end up paying taxes and a 10% federal penalty on any gains.




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