Part 1: What is a 529 Plan / Account, 529 Savings Plans, 529 Prepaid Tuition Plans
Part 2: Pros & Cons of 529 Plans / Accounts, Investing in Your Own State’s vs Other States’ 529 Plan, Best 529 Plan for You
Introduction to 529 Plan for Kids and Teens
This video explains the concept of 529 plans in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about 529 accounts, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a 529 plan
- What is a 529 savings plan
- What is a 529 prepaid tuition plan
- Advantages of 529 accounts / plans
- Disadvantages of 529 accounts / plans
- Can you only invest in your own state’s 529 plan
- How to choose a 529 account that’s best for you – which state’s 529 plan should you choose
- Can the beneficiary only go to a college within that state
What is a 529 plan / 529 account?
A 529 plan is a type of tax-advantaged account that is used to set aside money to cover the cost of education.
Although the plan gets its name from section 529 of the Federal Tax Code, most 529 plans are sponsored by the state governments and the exact rules for 529 plans are different for every state.
There are 2 main types of 529 plans: Savings Plans and Prepaid Tuition plans.
Usually, either parents or grandparents contribute money to pay for their child or grandchild’s education. But, the beneficiary of a 529 account can be anyone in the family – including the person who opened the account!
What is a 529 savings plan?
Depending on how those funds perform, the account will change in value. Later on, you can use the money in the fund tax free to pay for education including tuition, fees, textbooks, room and board, etc.
For a long time, 529s could only be used to pay for college and university, but now they can also be used to pay for K-12 education, certain apprenticeship programs, and student loan repayment.
What is a 529 prepaid tuition plan?
In a prepaid tuition plan, you lock in the cost of college tuition at its current cost, instead of saving up for college at its future cost.
Not all states offer prepaid tuition plans, and they may not be able to pay for tuition at every college. Also, the money cannot be used to cover room and board or for K-12 needs.
So, what are the advantages of 529 plans?
The main advantage of 529 plans is their tax benefit. You invest post-tax money, but the money invested grows tax free, and as long as you use it for education-related expenses, you don’t pay tax when you withdraw the money.
Another advantage is that there is no maximum contribution limit.
Also, if the original beneficiary cannot use the money for any reason, the beneficiary can be changed to pretty much any family member to continue reaping the tax benefit.
What are the disadvantages of 529 plans?
Since the funds in 529 plans are meant to be used for education and related expenses only, you have to pay tax on the money, and incur a 10% penalty when you withdraw the money for non-educational purposes.
You can withdraw the money penalty free if the beneficiary gets a scholarship or attends a US military academy, but you still have to pay tax.
Also, your investment has to be confined to the limited set of funds offered by the plan, which might have high fees.
Can I only invest in my own state’s 529 plan?
No, you can invest in any state’s 529 plan.
However, it might be better from a taxation perspective to go with your state’s 529 plan as some states offer additional tax deductions to local residents.
How do I choose a 529 plan / 529 account that’s best for me? And, can the beneficiary only go to a college within that state?
Which state’s 529 plan / 529 account should I choose?
All 529 savings plans can cover the cost of education in any state.
Check if your state offers additional tax benefits to residents investing in its 529 plan.
Another important factor to consider is the selection of funds offered within the plan and their expense ratio, as this can vary widely among the 529 plans across states.