A 529 Plan is a reference to the section of the IRS code which says that any state or educational intuition can create savings programs designed to aid families with the future expenses of higher education.
It is one of the best ways for parents to begin planning early to cover the tuition costs of their children.
These types of plans allow any member of your family, or even any of your friends, to make deposits into an account that can only be used to pay for college expenses. This money grows year after year tax free. The earlier you start, the more your money can compound through the years. If begun at birth of your child, you have close to 20 years to make regular deposits to offset these future expenses.
Furthermore, the beneficiary named in the plan can be changed at a later date in case your first born decided they would rather not go to college. You can simply change the name on the account to your younger child.
There is a management fee associated with most plans, typically around 1% of your funds, although plans can be found for as little as 0.4% per year. One of the best rated plans in the country is NY Saves 529 Direct Plan sponsored by New York.
How to Select a 529 Plan
Just because you live in one state does not mean you have to select a plan in that particular state. In fact, states can sponsor many plans and if you choose one in another state, that does not mean you have to use the money on college expenses in a college in that state.
However, there are many plans and they are not all created equally. Do your homework and select the right plan. There are many options but some are not worth investing in because the high management expenses offset any tax savings you gain. Some differ greatly and their management expenses can be well above 1%.
How to Open a 529 Plan
When you open a 529 plan for your child, you need to open it in your name, not your child. Your child will be named as the beneficiary of the plan, which as I stated earlier can be transferred to another family member if that child decides not to go to college.
Most plans have online forms available for download. Look for an Enrollment Kit if you prefer to do everything in writing, or you can open an account online.
You will need the following information ready:
- Your Name, Address, DOB and Social Security Number
- Information about your successor in the event something happens to you. This will be the person that is in control of the account, not the beneficiary. You will need their full name and DOB.
- Name of your beneficiary, typically your child. You will need their DOB and Social Security Number
- Name your investments. Do your homework on the site first so you can select an investment strategy.
- Name of your bank including account number and routing number if setting up ACH. Optionally, you can check with your employer to see if they allow payroll deductions into 529 plans.
What Happens to a 529 Plan if I Die?
Nothing, the account will still be there. It will continue under a new account owner that you established when you first opened the account. Not only do you declare a beneficiary (your child) for the account, but you also name an account successor should you die or become incapacitated.
However, be aware that the person that takes over the account name will have full rights over it, including withdrawing the money.
What if My Child Decides Not to Attend College?
You can change the beneficiary of your 529 Plan as many times as you like which can include immediate or extended family members, a friend or even yourself.
The important thing to remember is that the money will not be forfeited. There is no time limit placed on the use of the account so it can be passed down from generation to generation if someone in the current one does not wish to use it. Or, you can withdraw the money and pay taxes on it plus a penalty.
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What are the Penalties for Withdrawing Money from a 529 Account
If you withdraw any money designated in a 529 plan, it is taxed at your ordinary income rate plus a 10% penalty for early withdrawal or failure to use funds.
If the reason that you considering withdrawal is due to your child’s decision not to attend college, a better option might be to transfer the account beneficiary to another family member, or pass it to another generation in the family. There is no time limit on use of the funds in the account.
New York Saves: 529 Direct Plan
- NY 529 College Savings Plan can be used for a child, grandchild, friend or yourself
- Eligible for use at any 2- or 4-year college, vocational or technical school, or graduate school in the USA or overseas
- Eligible for use with ALL expenses associated with college
- Certain qualified withdrawals are allowed without penalty
- Can deposit up to $140,000 for a married couple for each beneficiary
- Contribute with check, automatic reinvestment plan, electronic bank transfer or payroll deduction
- Low initial deposit for as little as $25 with recurring $15 payroll deductions
- Annual asset based fee of 0.17% managed by Vanguard
NY State 529 Investment Options
The program features three options for various ages that automatically adjust to become more conservative in investments as the beneficiary nears college age.
There are also 13 other portfolio options for devising your own investment strategy.
NY Saves Direct 529
Think of a 529 plan as an IRA for the education of your child. It is a great way to create a disciplined savings plan that will allow the money to grow tax free until it is needed.
If you want to get an idea how much money you can accrue over a certain amount of time, play around with some numbers using a college savings calculator. This will demonstrate how your money can grow over time, tax free, with regular contribution.
Take advantage of the rules allowed in the tax code to limit your taxes and keep more of your money for your family.
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