A Guide In Answering The Most FAQs About A 529 Account
Perhaps you’ve heard of a prepaid college plan and are curious as to what the fuss is all about. How can a 529 account help me? What is it and what are the pros/cons? Who is eligible? Let’s examine at each FAQ and determine if it’s what you need. What is a 529 plan?A 529 plan allows parents to gradually pay for the expense of their child’s college with low monthly installments over an extended period of time (usually from the time your baby is born to graduation). It is a state-funded program authorized by the IRS. You make either a lump sum (prepaid plan) or payments to the state at regular intervals (savings/investment plan). Once the payments are complete, they in turn cover the cost of college tuition. The main benefit for you is that it helps lower income families to pace themselves to avoid falling into debt later. 529 plans are also tax exempt at the federal level. Who is eligible? If I live in one state, can I go with another state’s plan? Can I use the plan to attend a college not in the state I take up the plan?Let’s say you live in Virginia. You hear about the Florida Prepaid College Investment Plan. Are you eligible even though it’s Florida’s plan? Yes, as long as they are U.S. citizens with a valid SSN. Most plans have this in common with Florida’s 529 plans. Also, you don’t have to select a university or college within the state. So using the same example, I can reside in VA, choose a FL 529 plan, and my children can attend the University of Nebraska. Awesome, isn’t it? What types of payment methods are commonly used to pay for a 529 plan? How are payments made?Most plans allow you to pay by several of the following methods: check, money order, Western Union, debit card linked to a bank account, credit card, or even online merchants such as PayPal or Yahoo! Wallet. You may also opt to have it automatically taken out of your paycheck by your place of business (assuming your employer is set up to accommodate this). With a prepaid plan, one lump sum payment is made. With an investment plan, recurring bills (usually monthly) are sent to the parent. This is a better option for a family with budgeting issues or with high parent to children ratios. What if my I invest all that money into a plan, and then my child either decides not to go to college or earns a scholarship to pay his or her way. Am I out of all that money?No, you may withdraw money from the account at any time for any reason. Besides this, you may also choose to transfer the savings over to a new recipient. If you withdraw, you may be subject to higher income tax under federal law depending on the reason.
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