is investing in a 529 plan smart
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Is investing in a 529 plan smart

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The money in a savings plan, by contrast, can be used at just about any eligible institution. You aren't restricted to investing in your own state's plan, but doing so may get you a tax break, so check out that plan first. The earnings in a plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. The money you contribute to a plan isn't tax-deductible for federal income tax purposes.

However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a plan. In general, you'll need to invest in your home state's plan if you want a state tax deduction or credit. If you're willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident. The owner typically you may transfer to another plan once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries.

You may transfer the plan to another family member, defined as:. As with other kinds of investing, the earlier you get started, the better. With a savings plan, your money will have more time to grow and compound. With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year.

If you have money left over in a plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative, as described in the box above. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school.

Alternatively, many brokers and financial advisors offer plans, where you can choose from among several plans located around the country. States often charge a one-time account setup fee for a plan. The individual investments and funds that you have inside of your may also charge an ongoing fee. Look for low-cost mutual funds and ETFs to keep management fees low.

A plan is technically a custodial account. As such, an adult custodian is the one who controls the funds, but for the benefit of a minor. The beneficiary can assume control over the once they read age 18, but the funds must still be used for qualifying education-related expenses.

Qualified expenses for a plan include:. Securities and Exchange Commission. Internal Revenue Service. Accessed Feb. Saving For College. The Wall Street Journal. Certificate of Deposits CDs. Roth IRA. Saving for College. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Is a Plan? Understanding Plans.

Tax Advantages. Other Considerations. Part of. Complete Guide to Plans. Part Of. Best Plans. Key Takeaways plans are tax-advantaged accounts that can be used to cover educational expenses from kindergarten through graduate school. There are two basic types of plans: savings plans and prepaid tuition plans. You may transfer the plan to another family member, defined as: Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them Brother, sister, stepbrother, or stepsister Father or mother or ancestor of either Stepfather or stepmother Son or daughter of a brother or sister Brother or sister of father or mother Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law The spouse of any individual listed above First cousin.

How Can I Open a Plan? A plan is a tax-advantaged savings plan designed to encourage saving for future education costs. There are two types of plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. What are the differences between prepaid tuition plans and education savings plans? Prepaid Tuition Plans. Prepaid tuition plans let a saver or account holder purchase units or credits at participating colleges and universities usually public and in-state for future tuition and mandatory fees at current prices for the beneficiary.

Prepaid tuition plans usually cannot be used to pay for future room and board at colleges and universities and do not allow you to prepay for tuition for elementary and secondary schools. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not. It may only pay a small return on the original investment. Education Savings Plans.

Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U. A saver may typically choose among a range of investment portfolio options, which often include various mutual fund and exchange-traded fund ETF portfolios and a principal-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios sometimes called target-date portfolios.

Typically age-based portfolios automatically shift toward more conservative investments as the beneficiary gets closer to college age. If you are using a account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your money to grow. You also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon.

Because of these things, you may consider different investment options depending on when you plan to use the money that is invested. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC.

As with most investments, investments in education savings plans may not make any money and could lose some or all of the money invested. What fees and expenses will I pay if I invest in a plan? It is important to understand the fees and expenses associated with plans because they lower your returns. Fees and expenses will vary based on the type of plan education savings plan or prepaid tuition plan , whether it is a broker- or direct-sold plan, the plan itself and the underlying investments.

Some of these fees are collected by the state sponsor of the plan and some are collected by the plan manager. The asset management fees will depend on the investment option you select. Investors that purchase an education savings plan from a broker are typically subject to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees.

Fee Saving Tips. Many states offer direct-sold education savings plans in which savers can invest without paying additional broker-charged fees. In addition, some education savings plans will waive or reduce the administrative or maintenance fees if you maintain a large account balance, participate in an automatic contribution plan, or are a resident of the state sponsoring the plan. Some plans also offer fee waivers if the saver accepts electronic-only delivery of documents or enrolls online.

How does investing in a plan affect federal and state income taxes? Investing in a plan may offer savers special tax benefits. These benefits vary depending on the state and the plan. In addition, state and federal laws that affect plans could change.

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What is a plan? A plan is a tax-advantaged savings plan designed to encourage saving for future education costs. There are two types of plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

What are the differences between prepaid tuition plans and education savings plans? Prepaid Tuition Plans. Prepaid tuition plans let a saver or account holder purchase units or credits at participating colleges and universities usually public and in-state for future tuition and mandatory fees at current prices for the beneficiary.

Prepaid tuition plans usually cannot be used to pay for future room and board at colleges and universities and do not allow you to prepay for tuition for elementary and secondary schools. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not.

It may only pay a small return on the original investment. Education Savings Plans. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U. A saver may typically choose among a range of investment portfolio options, which often include various mutual fund and exchange-traded fund ETF portfolios and a principal-protected bank product.

These portfolios also may include static fund portfolios and age-based portfolios sometimes called target-date portfolios. Typically age-based portfolios automatically shift toward more conservative investments as the beneficiary gets closer to college age.

If you are using a account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your money to grow. You also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon. Because of these things, you may consider different investment options depending on when you plan to use the money that is invested. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC.

As with most investments, investments in education savings plans may not make any money and could lose some or all of the money invested. What fees and expenses will I pay if I invest in a plan? It is important to understand the fees and expenses associated with plans because they lower your returns. Fees and expenses will vary based on the type of plan education savings plan or prepaid tuition plan , whether it is a broker- or direct-sold plan, the plan itself and the underlying investments.

Some of these fees are collected by the state sponsor of the plan and some are collected by the plan manager. The asset management fees will depend on the investment option you select. Investors that purchase an education savings plan from a broker are typically subject to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees.

Fee Saving Tips. Many states offer direct-sold education savings plans in which savers can invest without paying additional broker-charged fees. In addition, some education savings plans will waive or reduce the administrative or maintenance fees if you maintain a large account balance, participate in an automatic contribution plan, or are a resident of the state sponsoring the plan.

Some plans also offer fee waivers if the saver accepts electronic-only delivery of documents or enrolls online. How does investing in a plan affect federal and state income taxes? Investing in a plan may offer savers special tax benefits. These benefits vary depending on the state and the plan.

A plan is an education savings plan that allows you to save for qualified education expenses. While the plan was developed to allow families to save for college, its mandate has since been expanded to include K tuition at private schools, as part of the changes from the Tax Cuts and Jobs Act. A plan allows contributions to grow tax-deferred, and any money may be withdrawn tax-free if used for qualified education expenses at eligible institutions.

A plan also allows you to invest in a range of options, including potentially high-return investments such as stocks and stock funds, safer, lower-return funds and moderate-return investments. All these features make the plan one of the best college savings plans. A plan comes in two broad varieties — a prepaid tuition plan and an education savings plan.

These plans are typically good only at the specific institution and are not transferable. An education savings plan allows a saver to open an investment account for the benefit of a future student. These plans can pay for tuition, as well as room and board, and some other qualified expenses too. Withdrawals may generally be used at any U. If you open an account through a broker, you may be able to benefit in a couple ways.

First, you can often choose from multiple plans, though you may lose some state tax deductions if you opt for an out-of-state plan. Second, you may be able to take advantage of the advice of an investment professional, who can help you set up how to invest in the plan and review it over time. While that sounds unattractive, the plan is actually surprisingly flexible and gives you many ways to avoid this outcome.

So at a minimum you can defer the penalty and taxes for a long time, if the original beneficiary has no qualified expenses. And that provides more time to find a potential new beneficiary who can take advantage of the account. A plan can have only one beneficiary at a time, but you can change the beneficiary multiple times to a number of qualified individuals. For example, an older child will have less time than a younger child to enjoy the benefits of compound growth.

It may make more sense to invest in something more conservative as the older child needs the funds, while the assets for the younger child can remain in more aggressive, growth-oriented investments. Sowhangar also notes that separate plans could make it easier to track contributions and stay compliant with tax regulations on gift tax exclusions. But these plans are not guaranteed by the federal government, and only some state governments guarantee them.

While this scenario is not likely, it is possible. These investments are not protected by federal or state governments. However, certain types of investments in bank products may be guaranteed by the Federal Deposit Insurance Corp. FDIC , meaning no risk of principal. Any remaining funds can be withdrawn, though you will owe taxes and penalties on any earnings from the contributions in the account.

Tax advantages are one of the biggest benefits of plans, and savers can benefit in several ways. The plan tax advantages are a good incentive. So you save taxes on your capital gains. Next, some states offer you a tax deduction for contributions that you make to a plan. While plans were originally created to help pay for college expenses, the plans can now be used for tuition expenses at private schools for grades K Recent tax changes permitted plans to be used for these primary and secondary schools.

For college, qualified expenses include tuition, fees and textbooks at an eligible institution. In addition, these expenses may also include room and board costs, as well as other expenses such as computers used primarily for educational purposes. In contrast, for K private school education expenses, only the cost of tuition can be paid from a plan without penalty. A plan can offer tax-deferred growth on your contributions, a tax-free withdrawal of money, and even tax deductions on your state taxes.

And these funds can be used to pay for other closely related educational expenses such as room and board, software and computers. So a plan offers a lot of flexibility to savers, especially those who can take full advantage. But in exchange for these benefits, you have to endure some drawbacks. Because the plans are standardized and administered by the state, you may not be able to invest in exactly what you want.

So if you have investing expertise, you may find the investment options less than optimal. In addition, not all states offer a tax deduction for contributions, and so you may simply not receive that benefit. And of course, one of the biggest downsides is the taxes and penalties that accrue if you withdraw the money for non-qualified expenses, even accidentally.

These states offer college savers a solid combination of low costs, good benefits and a proven track record of investment performance. After all, these are three big things you should be looking for in any plan.

The plan uses Vanguard funds, a leader in low-cost funds, and DFA funds. The plan offers 18 age-based options and allows you to take on a more aggressive portfolio where you could earn a higher return. Edvest also offers FDIC-backed products, so you have the option of a guaranteed, risk-free return.

Rowe Price, among others. The plan uses funds from Vanguard, a highly regarded low-cost leader, and Invesco, another well-known manager. West Virginia does not cap the tax deduction on filers, giving savers extra incentive to save as much as possible. Rowe Price, and others. The plan offers a wide variety of age-based funds and other portfolios, and provides many passive funds at low costs. However, contributions are not deductible on state income taxes for California residents.

How We Make Money. Editorial disclosure. James Royal. Written by. Bankrate senior reporter James F.

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How to Plan Smart with a 529 Plan

One of the biggest benefits of a plan is you don't have to pay capital gains tax on any distributions used for education. The capital gains. A plan may allow you to invest in a number of different assets, including stock funds, bond funds, and FDIC-protected money market accounts. A savings plan may be the best way to save money for college, but there are several alternatives that can make sense for some people.