As the cost of college continues to rise, you may want to start saving early for your children's education. One way to do this is to invest in a 529 plan. These plans are flexible, they offer tax savings and they are available in every state. Here are some facts to help you decide if a 529 plan is right for your family.
5 things you need to know about 529 plans
- You can choose your plan type. Two types of 529 plans can help you save for college: prepaid tuition plans and college savings plans. Prepaid tuition plans have state residency restrictions, but they allow you to lock in current tuition rates at participating colleges and universities. College savings plans aren't tied to specific universities, but they do not allow you to lock in tuition rates.
- You won't be taxed on your plan's earnings. As long as you use the money for eligible college expenses, you can make tax-free withdrawals from your 529 plan. However, you will owe federal income tax on any withdrawals that exceed your eligible college expenses. You'll also have to pay a 10 percent penalty on your plan's earnings for ineligible withdrawals.
- You can sign up for any state's plan. If you choose a 529 college savings plan, you aren't limited to your home's state plan; you can choose a plan from any participating state. This helps military families who have to consider residency requirements if they relocate to several states before their children head off to college.
- Anyone can contribute. Your friends and family can contribute to your child's 529 plan in lieu of birthday, holiday or graduation gifts. Be sure to check your individual plan for regulations regarding gift tax liabilities.
- Plans are easy to compare. Visit the U.S. Securities and Exchange Commission to get detailed plan information that includes a side-by-side comparison of the different 529 plan types.
When you start early with a 529 plan, you'll be better prepared to manage future college expenses. If you need help navigating the ins and outs of saving for college, you can get financial education services through your installation's personal financial management program. For contact information, visit MilitaryINSTALLATIONS. If you don't live near an installation, you can still access free personal financial counseling and resources through Military OneSource.