With the school year in full swing, you may be reminded about the future. Perhaps you’ve been setting aside some money for your child or grandchild in hopes of helping fund their college tuition one day. One great option for saving up for tuition might be the 529 plan. This tax-advantaged account is a great way to start setting aside funds for your loved ones. Let’s cover the two types of 529 plans you can find to suit your needs.
College Savings Plans1
College savings 529 plans are more widely used than prepaid tuition plans. With these plans, account holders contribute funds that are invested in preset options, most often mutual funds. You can select from several investment choices, and many plans offer target-date funds that automatically shift to more conservative investments as the beneficiary approaches college age. The value of the account depends on the performance of these investments over time.
Withdrawals from a college savings 529 plan can be used for qualified college expenses, as well as up to $10,000 per year for tuition at public, private, or religious K–12 schools. Recent legislation has expanded the uses for these plans. The SECURE Act of 2019 allows tax-free withdrawals for registered apprenticeship programs and up to $10,000 in student loan repayment for both beneficiaries and their siblings. The SECURE Act of 2022 permits rolling over up to $35,000 of unused funds into a Roth IRA if the account has been open for at least 15 years.ii Additionally, the OBBBA of 2025 further expands eligible expenses to include credentialing programs and will raise the annual K–12 withdrawal limit to $20,000 for taxable years beginning after December 31, 2025.iii
Prepaid Tuition Plans1
When using a prepaid 529 plan, savers or account holders are able to pay for tuition and other mandatory fees in advance at participating colleges and universities. This option usually does not allow for room and board to be paid for in advance, and secondary or elementary are not supported. Most of these plans are sponsored by state governments but aren’t by the federal government.
When considering a prepaid plan, it’s important to consider that not all states guarantee money prepaid into tuition. Not all colleges and universities participate in this type of plan as well, so choices for beneficiaries will be more limited with this plan.
Planning for your child or grandchild’s future can take some careful thought and consideration but is a great way to invest in their future, quite literally! If you want more information on 529 plans and other educational financial tools, we recommend reaching out to your financial professional.
1 https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html