A friend of mine was recently talking about how he’s saving for his 1 year old daughters college education through savings accounts and stock market investments. After asking if he was also using a 529 plan his reaction was “What’s that?” I realized most people don’t know what a 529 plan is, why it is a excellent savings tool, and why it’s a crucial family planning asset.
What is a 529 plan and what is its intended use?
A 529 plan is a tax advantaged investment account that is intended to be used for higher education (and sometimes private primary/secondary education) expenses. These expenses typically include tuition, books, room and board, computers and up to $10,000 of student loans. These expenses do not typically include travel expenses or required healthcare costs to go to school, such as immunizations.
How much can I contribute to a 529 plan?
This varies by state, but in general, there are typically no limits as to what you would like to contribute. If you go above $15K in contributions per year you may need fill out paperwork classifying the contribution as a gift. Another aspect of these investment plans is that anyone can contribute. If you have a 529 plan started for your 1 year old daughter, you can contribute to the plan, the grandparents can contribute to the plan, family friends can contribute the plan. This is an easy way to consolidate savings if multiple people would like to help with college savings.
Almost all 529 plans are controlled by individual states in the US. This means that what individuals can contribute and invest in will vary from state to state. Typically this ranges between $250K and $500K, aggregate.
Can I invest in stocks within my 529 account?
Yes. However, what you can invest in is typically limited by the 529 plan’s provider. Think of a 529 account like a 401K retirement account, you’re allowed to invest in different stocks, bonds, ETFs, etc. but at the discretion of what the provider deems to be safe investments. This will vary from provider to provider.
Can I use a 529 plan for my personal education?
Another friend of mine wanted to take a coding bootcamp to advance his career and was curious about using a 529 plan to pay for it. This is a very intriguing question as most people use 529 plans to save for their kids or their grandchildren. Rarely do you hear about using these plans for personal education.
The answer is, yes! You can use a 529 plan to save and pay for your education and you can change the beneficiary of the 529 plan at any time, if you decide. If you are planning on starting your higher education journey or going back to school this is a great tool to save. If you’re still deciding on going back to school you can check out my earlier article on whether or not going back to school is worth it.
Advanced tip: Take advantage of the ability to change the plans beneficiary at any time! If you are planning to have a child in the future, open a 529 account in your name and contribute some funds. Once the child is born, change the beneficiary to the child’s name. You’ve now effectively created a longer growth run way for your child’s college education investment.
How do I avoid questions from the IRS when I want to spend the money?
Spend directly from the 529 plan! Most colleges will accept funds directly from your 529 investment account. If you withdraw from the 529 plan and then use the funds to pay for college expenses, you will need receipts to show that the funds were used for education to avoid any withdrawal penalties.
What if I need the money from the 529 plan for purposes outside of education?
Not an issue! You can withdrawal all of the principle contributions without any tax or fee. If you need to withdrawal any of the gains from the account, you will have to pay income tax and will also incur a 10% fee for using the funds for expenses outside of education.