Section 529 Plans: The Road to College Savings
One minute they’re toddlers learning to walk, and the next they’re crossing the stage at high school graduation! So the sooner you start saving for a child’s college education, the better. Contributing to a tax-advantaged college savings plan can help.
Among the options worth considering are qualified tuition programs known as Section 529 plans. They come in two varieties — prepaid tuition plans and college savings plans. Every state offers one or both types. If you are not satisfied with the plan in your state of residence, you may be able to invest in a plan offered by another state. Tax benefits may vary for residents and non-residents, so check the requirements before you sign up.
Prepaid Plans
Prepaid tuition plans allow you to pay future tuition costs at today’s prices at eligible public and private institutions. Plans typically cover tuition and mandatory fees, although a few plans may include other qualified expenses. Plans are often guaranteed by the state in which they’re offered.
In Washington State, the Guaranteed Education Tuition (GET) program, which is considered a prepaid plan, is not currently accepting new enrollments or unit purchases during a two year review period as the state assesses the feasibility of the program. In 2015, state lawmakers passed the College Affordability Program, which included many provisions related to tuition at state universities. As such, these new tuition provisions affect some of the assumptions that the GET pricing and payout models have historically been based on, and individuals who purchased units may have bought units at a higher price than the current payout of $117.82 a unit.
Individuals who have GET units can request a refund until December 15, 2016 without penalties or fees. The refund will not be considered federal taxable income if it is rolled over to another qualified 529 savings plan within 60 days of the refund being processed.
College Savings Plans
These plans typically allow you to make contributions to an investment account set up to pay qualified expenses — tuition and fees, room and board, books, supplies, and required equipment — at accredited postsecondary institutions. Unlike with prepaid plans, your tuition costs will be based on the rates in effect when your child attends college.
College savings plans generally offer a choice of investment options. The degree of risk presented by the investments and the fluctuations of the market will affect the account’s value.
Tax and Other Benefits
Although 529 plan contributions are not deductible on your federal tax return, all investment earnings are exempt from federal — and sometimes state — tax as long as funds are used to pay qualified educational expenses. Generally, contribution limits for state plans exceed $200,000. Assets may be transferred between plans twice every 12 months. Unused assets may benefit another eligible family member without penalty. Section 529 plan investments may affect a student’s eligibility for financial aid, so factor that into your planning.
College savings plans have different investment options, so look at more than one before you choose.
About Alegria & Company, P.S.
We want to be your partner in success. Helping you with your financial needs is the perfect opportunity to do so. Our team of four partners and twenty-five professional staff located in two offices in Yakima and Prosser are well placed to serve clients from Yakima through the Lower Valley, the Columbia Basin and throughout the Pacific Northwest.