The recent adoption of the Bipartisan Budget Act has vastly improved these 529 college savings plans. Today, families have more control over their educational spending. These accounts were intended to be flexible—the original purpose of the accounts was to enable families to save for college education expenses. Yet today, they have expanded to pay for many more education and training costs.
Though they are marketed to families and students broadly, the 529 plans are administered by state governments. Currently, all but one state in the United States—Wyoming—provide at least one variety of a 529 plan. This gives account owners the flexibility to open up 529 accounts in any state no matter where they live. The recent changes in the budget bill have hugely increased the attractiveness of these accounts. Today, they provide families with an even better long-term education savings alternative.
With the passing of the new regulations, families are now able to use their 529 funds not only on college tuition but on many other qualified educational expenses. This includes subsidizing the cost of K-12 education, vocational training at trade schools, and the costs of apprenticeships. Under the new budget bill, 529 account holders can use their funds to pay off up to $10,000 in student loans. This restoration allows families to fully use their dollars in new ways.
Federal regulations also lay the groundwork for 529 plans. There’s a world of difference once you start looking at individual states and their quirky, unique rules. These differences may impact issues from moving beneficiaries to the program to gift counts per year. Nine states offer state income tax benefits. One way residents can cash in on these benefits is through investing in any in-state 529 plan or any out-of-state 529 plan.
“What it boils down to is investment options and fees,” said Tai Kim, a financial expert specializing in education savings plans. Given the significant varying degrees of quality among plans, families should prioritize plans that provide funds with robust historical performance, flexibility in portfolio construction, and transparency in their costs. That’s one reason almost every state provides a target-date mutual fund option in their 529 plans. Fortunately, these funds can make your investment decisions a lot easier.
Parents can begin saving for their child’s education as soon as they are born or even before birth by opening a 529 account. These accounts provide extraordinary tax benefits. When the money is used for qualified educational expenses, they continue to be tax-deferred and tax-exempt. This important feature of the program enables families to rub as much savings as possible while minimizing their tax liability.
Despite these advantages, it is vital for account holders to ensure that they use their 529 funds strictly for qualified educational expenses. Failing to pay attention to certain rules could lead to taxes and penalties that wipe out many of the financial advantages these accounts provide.