529 Plans: a good way to save for higher education

Use 529 plans for higher education and tax advantages.

In 1996, Congress created 529 plans to encourage saving for future education. It is a tax-advantage savings plan legally known as a “qualified tuition plan” and is typically sponsored by states, state agencies or educational institutions. The main advantage of a 529 plan is that the earnings are not subjected to federal taxes and generally not subject to state taxes when they are used for educational purposes.

Anyone can set up a 529 plan and name whoever they want as a beneficiary of the funds. There are no income restrictions and no limits on how many can be set up. Contributions to the plan cannot exceed the necessary cost for the educational expenses of the beneficiary. There may be gift tax consequences to the beneficiary if you contribute more than $13,000 per year.

There two types of 529 plans: pre-paid tuition plans and college savings plans. Pre-paid tuitions plans generally allow savers to purchases credits for future tuition. This may also include room and board. They are sponsored by state governments and have a residency requirement. Many state governments guarantee investments in their pre-paid plans. Michigan Educational Trust (MET) is Michigan’s pre-paid tuition program.

College saving plans allow a saver to establish an account for a student for the purpose of paying eligible college expenses. Typically an account holder can choose among several investment options for their contributions, which the plan invest on behalf of the account holder. These investment options include stock mutual funds, bond mutual funds and money market funds. It also includes options of an age-based portfolio that automatically shift toward more conservative investments as the beneficiary approaches college age. This plan is not guaranteed by state government and is not federally insured.

All the states sponsor at least one type of 529 plans and each is somewhat unique. Participants are not restricted to their own state’s 529 plans. Individuals are encouraged to shop and compare 529 plans from different states.

Michigan State University Extension has additional information on savings at www.mimoneyhealth.org.

For additional information on paying for higher education:

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