Let’s start with the basics. Here are some questions I often get about the college savings accounts.
How does a 529 plan work?
You can put money into a 529 plan two ways. There is a prepaid tuition plan in some states that allows you to pay for tuition at a state school in advance. The idea is that you get tomorrow’s tuition at today’s prices.
But be careful that you don’t neglect to also save for room and board and other education expenses not covered in a prepaid tuition contract.
The second type of 529 is the more popular plan that allows you to invest in a tax-deferred account. This one operates much like a 401(k). You select how you want the money invested. For my three children, my husband and I chose “age-based” investment options, which means the younger the child, the more aggressive the investment options may be. As your child grows older, the money is gradually moved to more conservative investments.
What’s the best thing about 529 plans?
Money withdrawn from a 529 account is free from federal tax (and, in most cases, free from state and local taxes as well) when used for qualifying college costs. Additionally, many states offer tax deductions for residents who make contributions to a 529 plan. In Maryland, we get a maximum $2,500 state tax break per account each year.
If I invest in my state’s 529 plan, is my child limited to going to an in-state college?
This is a common misconception. Money invested in these college savings accounts can be used for qualified expenses at any public or private institution, regardless of where you set up the account or where the beneficiary ultimately attends school. And although the plans are state-sponsored, you can invest in any state’s plan regardless of where you or the beneficiary lives. Let’s say you’re a grandparent living in Florida. You can open a plan for your grandchild in Virginia if you like that plan. But the child may end up going to college in New York and still be able to use the money in the account.
However, you should also be aware that with prepaid tuition plans, if your child chooses an out-of-state school, you may have to make up any difference in tuition prices, the National Association of Student Financial Aid Administrators points out.
I’m sure you have more questions. Here are some ways to get answers.
My go-to site for all things 529 is savingforcollege.com. On Friday, May 29, the site will host a live discussion where experts will answer your questions starting at 1 p.m. Eastern. To register, search for “529 Day Celebration.” Participants are automatically entered to win some prize money.
Many states are promoting 529 day by holding contests. Some of the sweepstake prize money is pretty substantial.
Of course, the contests are the lure to get you to learn about the savings tool. Even if you don’t win any money, you’ll come away with some valuable information.
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or singletarym@washpost.com