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529 Plans

By Independent Bank April 13 2020 Savings Tips

5 Frequently Asked Questions

Happy group of students sitting at the park talking

With education expenses on the rise, saving for college is as important as ever. If you have a child, one way you can save for their college costs is through a 529 plan. This is a specific type of college savings account that allows you, as the account owner, to control the investment—and your child, as the account beneficiary, to use the money for college expenses. One reason 529 plans are favored when it comes to saving for college is that they're pretty simple. Still, you may have a couple of questions about these plans. Check out the answers below.

Who can open a 529 plan?

There are no restrictions as to whom can open a 529 plan on a child's behalf. Parents and grandparents are the most common investors, but you can certainly open a plan for a friend, a niece or nephew, or a cousin. You can even open a 529 plan for yourself, if desired. This might be a good choice if you're planning on going back to college a few years down the road.

How much can you contribute?

Each state has its own limits. These limits are based on total contributions over the life of the plan; they are not annual. States' limits vary from $235,000 to $529,000. Keep in mind that these limits are per beneficiary, so you could contribute up to the limit in separate plans for each of your children. Your investment advisor can clue you in to your state's limits when you open your account.

What if your child does not go to college?

Rightfully, you might wonder what will become of the money in your 529 plan if the beneficiary of the account decides not to attend college. Rest assured, you won't lose the funds. You can change the name of the beneficiary on the account. For example, you could re-designate the funds to another child in your family. Another option is to withdraw the funds yourself, although you will pay income tax on your earnings and a 10% federal penalty for doing so.

Keep in mind that the funds in a 529 plan do not have to strictly be spent on college. They can also be used to pay for trade school programs, which may prepare individuals for lucrative careers in real estate, HVAC, construction, and allied health.

What are the tax advantages of a 529 plan?

A 529 plan offers tax-free growth and tax-free withdrawals. This means that when your beneficiary withdraws funds to pay for college, they will not have to pay taxes on the money they withdraw.

You may also be eligible for a state tax deduction on any funds you contribute to your child's 529 plan. This varies by state, so check with your tax professional to verify.

Can a 529 plan be joint-owned?

In other words, can you and your spouse or partner co-open a 529 plan on your child's behalf? The answer is "no." This kind of college savings plan can only have one owner. However, two people could open separate accounts for the same beneficiary. So you and your spouse could open two separate accounts, and the funds in both accounts could go to the same child. 

The earlier you start saving for college, the better. A 529 plan is a tax-advantaged way to set aside funds to ensure your child can one day afford the education they deserve. These plans are easy to open, maintain, and contribute to, and they allow flexibility for your child to explore a wide range of career paths. 

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