It can be hard to afford college. Thankfully, you’ve got some options to make it a little easier. One of these is a 529 plan, a popular tax-exempt savings account that can only be used for college expenses. It can help you save for college from an early age, and smart use of it could reduce your student loans dramatically.
You may not need to set one up yourself, as your parents may have already done so for you. Regardless, it’s a good idea to be aware of what they are and how they function — especially if you’re currently using one to save for college or soon will be. Note that people other than the account owner can contribute to 529 plans, and you can even open your own account if you’re 18 or older. You can open as many as you want! But don’t do that. Be smart.
There are two types of 529 plans, and you should check to see which kind you have before you decide how and where to spend it. The first kind is the prepaid variety, which locks in tuition prices at the time it’s started. It sounds good on paper and can still help you save for college, but it has some disadvantages. For example, this type of 529 can be used only for tuition at public, in-state colleges, while the other kind, the 529 savings plan, can be used for tuition as well as assorted costs such as books, room, and board at a variety of schools from around the country.
These 529 savings plans definitely give you more freedom, but they still limit use to “qualified withdrawals,” according to U.S. News & World Report. This term refers to the aforementioned fees and tuition. It also means that if 529 money is spent on anything else, that tax exemption no longer applies. Fortunately, you can apply your money toward not only undergraduate and graduate degrees, but to trade schools as well. What’s more, each state offers its own unique plan, but you aren’t restricted to your home state. You (or your parents) can shop around.
Where does the money come from?
The money in a 529 savings plan usually comes in the form of mutual funds — the owner may choose from two approaches in building the fund. The first is a portfolio that begins by investing in riskier assets such as stocks before switching to less risky ones like bonds as the recipient of the money approaches college age. With the second option, investing remains conservative for the entire process.
Keep in mind that fees may apply to 529 plans. You’ll still more than likely end up with more money than you’ve put in, but it all depends on the plan that’s chosen. There’s also a limit on contributions that varies from plan to plan, though it’s generally high enough to pay for most college expenses. Another important thing to note is that prepaid tuition plans impose a time limit on withdrawals, while 529 savings plans typically don’t.
Takeaway: Why you should use a 529 plan
The main reason to use a 529 is because the money that’s invested isn’t taxed. It’s something your parents may have set up for you as well; your main responsibility is to know how to spend that money. As long as you’re using the money to save for college, 529 plans provide an easy way to avoid going into too much debt. And if you’re starting one for yourself (it’s never too late!), you have many options depending on your investment style, income and where you want to spend the money.