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State-run 529 plans are becoming an attractive option for parents who are looking
for a tax-free method of college savings. Below are answers to some of the most
frequently asked questions about 529 plans, useful information to help you navigate
this special financial terrain.
Q. Can you tell me the benefits of starting a 529 plan?
A.The beauty of a 529 savings plan is tax-free compound interest. All 529 account earnings and withdrawals (for educational purposes) are not only free from federal taxes, but also if you invest with the 529 plan in your state, you may even qualify for a tax deduction. Over a period
of years, the interest on money you would have otherwise paid in taxes grows and
grows—thereby even making you more college cash.
Q. What can the money from a 529 plan be used for?
A. The quick answer is, "qualified educational expenses." Tuition qualifies
as the primary purpose for funds in all states, and most states also allow 529
funds to cover room and board, books, and fees. In other words, junior won’t
be able to buy a Corvette with it.
Q. I want to start a 529 plan for my younger cousin. Is this possible?
A. You can open an account on behalf of any person you wish, regardless of their
relationship to you and regardless of your income. You may want to open one for
a family member, or even someone not related to you. What a great gift!
Q. How much money is required in opening a 529 plan?
A. Minimum opening balances differ from state to state, but some are as low as
$50. Likewise, each state sets a ceiling on the maximum amount that an account
balance can reach (each state sets a celing on the maximum aount between $100,000
and $270,000 per beneficiary).
Q. How do I make contributions to the account once I’ve opened it?
A. Contributions to the account must be made in cash only: no bonds, stocks, or
other securities.
Q. Will my 529 account holdings reduce my child’s eligibility for
financial aid?
A. Yes, but so would a savings account with the same amount of money in it. A
529 savings account is considered an asset of the owner, but any gains on the
account are considered to belong to the beneficiary.
Q. What happens if my child decides not to go to college?
A. You have a couple of options. First, you can withdraw the money, which will
result in paying taxes and penalties. Second, you could leave the money in the
account in the event that your child changes their mind in the future. Third,
you could change the beneficiary to any person, such as another son or daughter.
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