529 Plan

What is the 529 Plan?

529 Plan is an educational investment plan through which parents or grandparents can save money for their child or grandchild and can save tax by investing in this plan as there is no tax levied until the money stays in the account or used for payment of qualified educational expenses.

History

  • The 529 plan was adopted by the US from Section 529 of the federal tax code. The plan was originated from Michigan – a state of the US. This state began this plan at ground level by creating a fund by Michigan Educational Trust at a promise that the trust will pay the qualified educational expenses of the beneficiary at any Michigan recognized college or university on investing in this fund by person resident of the state.
  • This plan got famous as it benefited many students, and other states of the US also started adopting this plan at the state level. Subsequently, the plan was recognized by the US Government, and tax benefits are also given on investment in this plan.
529 Plan

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How does it Work?

  • An investor invests in the 529 Plan, and then the 529 plan management team invests the funds in safe securities so as to grow the money. The management will decide the various schemes on investment. An investor can select any scheme and invest the same into that scheme. The growth of money in 529 plans is also tax-free.
  • The investor can use the money in his 529 accounts at any time after the prescribed time is over for the qualified educational expenses of the beneficiary. If the money is used for another purpose, it is subject to tax and a 10% penalty. This plan also allows the investor to pay the requisite fees of the beneficiary at the current cost for future education so that the education of the beneficiary can be completed without any financial problem.

Types of 529 Plan

Types of 529 Plan

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#1 – Investment Plan

Investment plan allows the person to open the account under 529 pan schemes and invest any amount in this account, and such investment will be tax benefits, and also withdrawals from the account are tax-free if the amount is used for payment of qualified educational expenses of the beneficiary.

#2 – Pre-Paid Plan

A Pre-paid plan allows the person to pay the qualified education expenses of the beneficiary to a recognized college or university at the current cost so that beneficiary does not have a need to pay in the future and worry about inflation and increased cost of future education expenses.

Who Can Open?

Any resident of the US belongs to any income group that can open a 529 plan account to secure future educational expenses of the beneficiary, and the beneficiary can be any person. To open this account, the account holder should be greater than or equal to 18 years of age and shall have the tax identity number, legal ID, and legal address proof of the US. Details of a beneficiary like age, planned education, legal ID, etc. are also to be submitted to authority at the time of opening the account.

What Can 529 Plan be Used for?

  1. Qualified Educational expenses of the beneficiary for primary education, and it includes tuition expenses for school up to $ 10,000 each year on each beneficiary.
  2. Qualified expenses of the beneficiary for secondary and higher secondary education, and it includes college fees, payment to recognized universities, etc.
  3. The amount can also be used for payment of training fees after secondary education.
  4. The amount can also be used for payment of expenses like training or learning or participation fees of any educational institution administered by the US educational department.
  5. The amount can also be used to pay private tuition expenses but to a limited extent.

Advantages

  1. Financial assistance for qualified educational expenses.
  2. Reduced stress about future costs or inflation.
  3. Tax saving advantage on investment.
  4. Tax-free income on the growth of an investment.
  5. Anytime withdrawals are permitted.
  6. No fixed contribution limits any amount that can be contributed.
  7. Beneficiaries can be changed.

Disadvantages

  1. The benefit of the plan is limited only to qualified educational expenses.
  2. Higher penalties on a withdrawal from the account for a purpose other than prescribed.
  3. It does not consider areas other than education.
  4. Sometimes proves to be costly investments as return on investment is limited.
  5. Investment schemes of the plan have limited investment options.
  6. Results in blockage of money as the money cannot be used for other emergency purposes.

Conclusion

  • This is a tax saving and investment plan. It is beneficial for education seekers, whether it be primary, secondary, and higher secondary education. The plan aims to provide basic education to all, and for that, the administrative authority of the plan makes the schemes invest in the plan so that future educational expenses can be minimized.
  • According to the rules this plan, any person who is a citizen of the US having age equal to or greater than 18 years with legal Id and address proof can open the account for himself or the beneficiary. The details of the beneficiary are also to be provided at the time of opening an account.
  • There are two types of 529 plan investment plans and a pre-paid plan. The investment plan allows investing in selected schemes and withdrawal for payment of qualified educational expenses, and withdrawal will be tax-free. Money withdrawal for a purpose other than prescribed can attract the tax and penalty both. The main drawback of this plan is that it is only limited to educational expenses only.

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