What Kinds of 529 Plans Are There?
Before you decide to open a 529 plan on your child’s behalf, consider which type of plan would be appropriate, since each has its own restrictions and advantages. The following are the three types of 529 plans available in the U.S.:
College Savings Plans
The most commonly used 529 plan is the college savings plan, which is also known as an education savings plan since the 2017 tax law added elementary and secondary school tuition as eligible expenses for 529 plans. However, payments toward primary or secondary education under these programs is limited to $10,000 per year for each beneficiary, and the fact that these payments are required earlier in life mean that the plan has had less time to generate earnings – two facts to keep in mind when considering opening a 529 plan for something other than college.
Generally speaking, college savings plans are much more flexible than prepaid tuition plans, since they can be used to cover expenses like books, computers, equipment, and room and board; some plans even allow you to directly pay qualifying third parties – landlords offering off-campus housing, for instance. Additionally, the funds in a 529 college savings plan can go toward almost any institution of higher learning, including a few outside the country, and they don’t require you to sign any contract. In other words, you can contribute to your 529 plan whenever you want, and you decide the amount of each contribution.
And just as college savings plans offer flexibility in how the funds are used, so too do they offer a variety of investment options that remain firmly in control of the account owner. Some 529 plans offer clearly defined choices, while others allow owners to decide for themselves the kind of returns they want to aim for – and the level of risk they’re willing to accept. Each state has its own version of a college savings plan, though, and since you can sign up for plans around the country, be sure to check out all your options.
Prepaid Tuition Plans
While less popular than standard college savings plans, prepaid tuition plans offer some notable benefits that should not be ignored – namely, they help you control the cost of college while making it easier to save for education. Many of the pros and cons of these plans revolve around the fact that they require a contract, one that effectively locks in tuition rates. Obviously, this feature can be overwhelmingly beneficial for those with young or unborn children who won’t be going to college for years or decades, because it guards against the inevitable – and significant – increases in tuition that happen over time. However, because the rate enshrined in the contract is based on the cost of tuition in the state offering the plan, there is relatively little flexibility in choosing schools compared to college savings plans, and most prepaid tuition plans are only available to state residents.
The investment opportunities offered by 529 prepaid tuition plans are limited as well, especially since the account owner has no control over how their contributions are invested. Typically, an account will be handled by a state investment manager who oversees the growth of all the state’s plans with the goal of ensuring that today’s contributions match the cost of future tuition, though it’s worth noting that some states guarantee returns on prepaid tuition plans. However, the funds in one of these 529 accounts can often only be used for tuition and certain fees, not for the additional costs of going away to school, so you may still have to pay some out-of-pocket costs when freshman year rolls around.
Another feature of prepaid tuition plan contracts is that they mandate regular contributions of a certain amount; to stop or change these payments, you’ll have to cancel the contract altogether. Also, friends and family members may find that they have a harder time contributing to a 529 prepaid tuition plan than they would for a college savings plan, and many states don’t offer one at all. That said, these plans require next to no maintenance from account owners, so they may be a good option for those who want to simply set up a 529 plan and forget about it, and the fact that there is rarely any limit on a prepaid tuition plan could make them an excellent option for those looking to put away a substantial sum of money for their child’s future.
ABLE (529A) Accounts
The third and final type of 529 savings plan was added in 2014 as part of the Achieving a Better Life Experience (ABLE) Act. This account was specifically designed to help Americans with disabilities cover expenses for education, as well as things like housing costs, healthcare expenses, employment support, and financial management services. In practice, a 529A account works in much the same way as a traditional 529 college savings plan; contributions and distributions come with lots of flexibility, and residents around the country can pick whatever state plan they want.
However, there are a few notable differences between 529 plans and 529A accounts, aside from the expanded coverage of the latter. One point of particular importance is the fact that the first $100,000 in a 529A account will not count against a beneficiary for Supplemental Security Income (SSI) purposes, so you can confidently save a significant amount toward college tuition and other expenses without any loss of income. Should your account grow beyond this limit, you’ll lose SSI assistance, but once it dips below that $100,000 mark, those benefits will resume once again. ABLE accounts also come with a cap on savings, albeit a fairly high one; depending on the state, you can keep between $235,000 and $529,000 in your ABLE account.
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