by: David Little, Wealth Advisor at Keel Point in Huntsville, Alabama
May 29th is National 529 College Savings Plan Day. Many have taken advantage of this great tool to save money for our children’s education. The average in-state tuition for a public four-year college is $9,410, and for out-of-state that number jumps to $23,890 (source).
Higher education inflation is a major concern for many parents. According to The College Board®, looking back at the last decade, the 10-year historical rate of increase is approximately 5%.
What Is a 529 plan?
529 plans allow individuals to contribute funds to an account on behalf of another person. These funds will need to be used for college or higher education expenses.
There is no limitation on who can add money to a 529 account. It is an excellent way for parents, grandparents, relatives, and even family friends to contribute to your child’s educational future.
- federal tax-free growth
- tax-free withdrawals for qualified education expenses
- full or partial tax credit or deduction for contributions to their state’s plan (depends on the state)
What Can I Spend the Funds On?
You may only spend the money you put into a 529 plan on qualified higher education expenses.
These expenses include:
- equipment required for enrollment or attendance
What If My Child Gets a Full Scholarship?
If the beneficiary were to be awarded a full scholarship, and you decided to buy a new pontoon boat with the money from the 529 plan, the distribution will be subject to income tax and a 10% penalty.
You can change the beneficiary of the plan, and as long as they use the assets for higher education expenses, you’ll be good to go.
Where Should I Open My Plan?
Every state has its own 529 Plan. While most residents choose their home state’s plan, you are not limited by your geography.
For example, you may live in Alabama and choose to invest in the Virginia 529 plan. It is important to consult with your Financial Advisor when considering a 529 plan. if you chose one from a different state, different rules may apply that could affect the deductibility of your contributions.
Keel Point is here to help and can assist your family in establishing the right 529 plan for your future college students.