Using a §529 Plan to Save for College

With the high cost of postsecondary education, §529 plans remain a popular option for those looking to save for a child’s future education expenses. There are two types of §529 plans available: pre-paid tuition plans and college savings plans. Every state sponsors at least one of these types of plans. Eligible educational institutions may also sponsor a pre-paid tuition plan.

There are several perks to setting up this sort of plan. In general, there is no tax due on §529 plan distributions and the contribution limits are higher than a Coverdell Education Savings Account. In addition, you can contribute to a child’s plan even when he or she is older than age 18.

For plan distributions to remain tax-exempt, the amount distributed cannot be greater than the beneficiary’s adjusted qualified education expenses, which include:

• Required tuition and fees.
• Books.
• Supplies and equipment, such as computer or peripheral equipment, computer software, internet access and related services if used primarily by the enrolled student.
• Room and board (for half-time and full-time students).

Now, what if you set up a §529 plan for a child who ultimately decides to forego a postsecondary education?

Fortunately, you can move the plan over to a new beneficiary, as long as the new beneficiary is a family member, or yourself. You can also cash out on the plan, but you’ll have to pay income taxes and a 10% penalty on the earnings.