Collge Planning

College is generally not a surprise. From the time your children are born, if you suspect they’re going to go to college—and about 68% of high school graduates do—you have 18 years to plan for it. And yet, only two in five families with kids in college made a plan to pay for it, according to Sallie Mae’s most recent How America Pays for College report—and that number that hasn’t changed significantly since 2010 when Sallie Mae started asking the question.

A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities. 529 plans are named after Section 529 of the Internal Revenue Code (IRC), which was added in 1996 to authorize tax-free status for 'qualified tuition programs'. Earnings in 529 plans accumulate on a tax-deferred basis and distributions are not taxed federally when used for qualified higher education expenses. The definition of qualified higher education expenses was expanded in 2015 to include computers and in 2017 to include up to $10,000 annually in K-12 tuition.
 

Are 529 plan contributions tax-deductible?
Much like a Roth IRA, contributions to a 529 plan are post-tax and are not deductible from federal income taxes. However, over 30 states and the District of Columbia offer state income tax deductions or tax credits for contributions to 529 plans, though you may be restricted to investing in your home state's 529 plan in order to claim the benefit. Funds in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn for qualified education expenses.

Can you use a 529 plan for any college?
You can invest in any state 529 plan, not just your own state’s 529 plan. 529 plans can be used to pay for college costs at any qualified college nationwide. In most plans, your choice of college is not affected by the state that sponsored your 529 college savings plan. You can be a California resident, invest in a Vermont plan and send your student to college in North Carolina. You can use your 529 plan at more than 6,000 U.S. colleges and universities and more than 400 foreign colleges and universities. Check to see if your institution is eligible under 529 rules.

What can a 529 plan be used for?
A 529 plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified education expenses. For college, university and other eligible post-secondary educational institutions, this includes tuition, fees, books, supplies, equipment, computers and sometimes room and board. The IRS also allows tax-free withdrawals of up to $10,000 per year, per beneficiary to pay for tuition expenses at private, public and religious K-12 schools.

What is not covered by a 529 plan?
The funds in a 529 plan are yours, and you can always withdraw them for any purpose. However, the earnings portion of a non-qualified distribution will be subject to ordinary income taxes and a 10% tax penalty, though there are exceptions.At the college or post-secondary level, a general rule of thumb is that expenses required for enrollment in an eligible institution are covered. However, there are some costs that you may believe are necessary, but the IRS does not consider a qualified expense. For example, a student's health insurance, transportation costs and student loan payments are not qualified expenses.

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