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Jon T. Upham, MA, AIF

Principal, SageView

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Saving for College: A 529 Plan & Its Benefits

11/14/2013 08:29AM | 7607 views

Obtaining a college education is so important today, but sometimes it seems like it is very difficult to figure out how to pay for it. Whether you are saving for your son, daughter, niece, nephew or grandchild, it can be a challenge. As you see every day, the cost of things keep going up, and it should be no surprise that the cost of a college education continues to rise as well. For many, next to saving for your home, your biggest financial challenge may be saving for your child's college education.

How do you know how much to save? How much will a college education cost? What if you save all of this money and then your child decides not to go to college? The answers to these questions depend on how and where you've kept the money. Luckily, today there are several flexible ways to save for future college tuition costs, including opening what is referred to as a 529 college savings plan.

A 529 college savings plan is a very simple way to save money for your child’s (or another family member’s) college education. The benefits are tremendous.

Here are some of the best reasons to open a 529 account:

  • You pay no federal taxes on the account's earnings, and there may be state tax benefits as well. (Unfortunately, California is one of the states that has no state tax benefits). 
  • The child doesn't have control of or access to the account -- you have the control. 
  • If the child doesn't want to go to college, you can roll the account over to another family member. 
  • Anyone can contribute to the account

What is a 529 Plan?

The 529 Plan (named for Section 529 of the IRS tax code) is a savings plan for college education.

A 529 plan is a state-sponsored investment program. That is, the state sets up the plan with an asset or investment management company of its choice, and you open a 529 account with that asset management/investment company according to the state's plan features. You're the owner of the account, and the child for whom the account is set up is the beneficiary. You won't deal directly with the state, but rather with the asset management/investment company. Like any other investment, a 529 account is subject to market risk – the state doesn't guarantee your money. (Even though each state has an asset management/investment company it has partnered with, you are not required to use the company that is partnered with the state you live in).

State-to-State Variations

Because each state can control some of the features of its own plan, there are variations from state to state. Also, some states offer multiple plans which can differ from each other, so make sure to compare those too.

There are no residency requirements on 529 plans. You can invest in any state's plan, whether you live there or not, and you can draw funds from the plan to pay for college in any state, whether it's in your home state, the plan's home state, or some other state.

Websites such as or offer  comprehensive comparison tools that let you see which plans are available in which state, and compare their features.

The Benefit of No Federal Taxes

All of a 529 account's earnings/interest  are exempt from federal taxes when they're withdrawn if they are used for qualified education expenses. This means that, unlike the taxes you have to pay on earnings/interest from regular investments, you won't pay any taxes on 529 account earnings unless you end up using the money for something other than higher education.

One of the nice things about a 529 plan is that qualified education expenses include room and board, fees, books and even computers.

You Control the Account

Unlike other types of accounts, the beneficiary doesn't gain control of the money at a specific age. The account owner always has control of the money. You don't have to worry that your child will grow up and spend the money poorly.

There are no restrictions on who you can open an account for. You can open an account for your child, a friend's child, a relative, or even yourself. 529 plans have no age restrictions either, so an adult could open an account to pay for some classes next year.

If it turns out that the beneficiary will not be using the money in the 529 plan, there's a lot of flexibility in how you can ultimately use the money. You can change the beneficiary, or you can withdraw the money for non-education purposes. If you do withdraw the money for a non-educational purpose, you will have to pay the tax on the earnings, plus a 10 percent federal tax penalty.

Selecting the Right Plan

Choosing the right 529 plan is no harder than choosing anything else in the financial world. If you do your research, you can find the right plan for your family. Here are few guidelines to get you started:

  • Look at your own state's plan. Plenty of states offer a tax deduction on 529 contributions, and many also exempt state taxes on the earnings upon withdrawal.
  • Research the manager of the plan and get documentation of the investment's past performance.
  • Examine the fees the plan charges. Finding a low-cost plan means looking at several possible charges. For instance, some states charge an enrollment fee to open the account, and some also charge annual maintenance fees.
  • Check age limitations. A few state programs require your child to use the money prior to a certain age, or require that the child be under a certain age in order for you to be able to open an account. There may even be limits to how long the accounts can remain open without any withdrawals.
  • Investigate the fees related to withdrawing your money.
  • Look at the minimums and maximums for contributions. Determine how much you want to have in the account when your child or family member enters college.

To gain more understanding or to enroll in a 529 Plan, you can reach out to a local financial advisor, your bank, or review information on the following websites: or

Article sourced through SageView Advisory Group

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