529 Plans

If you’re like most parents, chances are you would like to find the most suitable way to save for your children’s college education. On today’s blog, we at Federal National Funding would like to introduce you to the 529 plan.

A 529 plan (also known as a qualified tuition plan) is a popular way to save for higher education. Perhaps you have heard of the original form of the 529, a state operated prepaid tuition plan that allows you to purchase units of future tuition at to today’s rates with the plan assuming the responsibility of investing the funds to keep pace with inflation. Many state governments guarantee that the cost of an equal number of units in the sponsoring states will be covered regardless of investment performance or the rate of tuition increase. Remember, each state has different rules and restrictions. Prepaid tuition programs will typically pay for future college tuition at any sponsoring state’s eligible colleges or university—some will even pay an equal amount for out of state or private institutions.

The other type is the savings plan. It’s close to an investment account but the funds accumulate tax deferred. Withdrawals from state sponsored plans are free of federal income tax as long as they re used for qualified college expenses. Many states also exempt withdrawals from state income taxes for qualified for higher education expenses. Unlike prepaid tuition plans, contributions can be used for all qualified college expenses (tuition, fee, books, equipment, supplies, room and board) and the funds can be used at all post-secondary schools in the United States. Remember that there is a risk associated with this plan—investments may not preform as well as anticipated and may even lose money.

In many cases, 529 plans place investment dollars in a mix of funds based on the age of the beneficiary with account allocations becoming more restrictive as the time for college draws closer. Recently, states have hired professional money managers to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. Earnings from 529 plans are not taxed when used to pay for eligible college expenses. And there are even consumer-friendly reward programs that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.

An advantage to the 529 is that contributions are considered gifts to the beneficiary, meaning that anyone can make contributions of up to $14,000 a year without facing gift tax consequences. Additionally, contributions can be made in monthly installments or be paid in a lump sum.

For more information about 529 plans click here or call us today at 201-342-3300. One of our associates will be happy to help you.