Section 529 College Savings Plans – named for section 529 of the Internal Revenue Code, which allows states to set up qualified tuition programs – are education savings plans designed to help families set aside money for college funding.
529 plans are simple, flexible and affordable. The money invested and subsequent earnings will not be subject to federal income taxes1 if the money is used for qualified educational expenses, including tuition, fees, books, supplies and other items required for enrollment or attendance. To be eligible to use 529 college plan funds, students must be enrolled at least half-time at any accredited college, university, vocational school or other post-secondary educational institution (public, nonprofit or privately owned).
There are two types of 529 programs, with these significant differences:
Prepaid Tuition Plan — These 529 savings plans let you lock in future tuition rates at in-state public colleges at current prices that are usually guaranteed by the state. For example, if a family purchases shares equal to a year of tuition at a state college, the shares will always be worth a year of tuition, even 10 years later when tuition rates may be significantly higher. This plan is only operated by state governments.
529 College Savings Plan — These 529 plans have no locks on tuition rates and no guarantees. Consider these features and requirements of 529 plans:
Earnings grow tax-deferred and withdrawals are tax-free when the distributions are used for qualified higher education expenses.
The plan owner has complete control of the beneficiaries and distribution of funds in the 529 plan.
Anyone can take advantage of a 529 plan; generally there are no income limitations or age restrictions.
You can contribute to both a Section 529 and a Coverdell Education Savings Account in the same year, but there may be gift tax implications if you give more than $11,000 per child.
A state income-tax deduction may be allowed for contributions to the plan made by a state resident.
529 plans have a low impact on student financial aid eligibility since the funds in the plan are treated as an asset of the parent or other account owner, and not the student.
If the child doesn’t need all of the money in the 529 savings plan, or doesn’t pursue a post-secondary education, the plan account can be:
• held until a later date when the child may decide to attend college (as long as the child is younger than age 30);
• transferred to another member of the family;
• refunded according to the policy of your specific Section 529 College Savings Plan. Federal law imposes a 10 percent penalty on earnings — not on principal — for non-qualified distributions, except in the case of a child’s death, disability or receipt of a scholarship.
Farm Bureau Financial Services offers 529 Plans through these well-respected mutual fund families — American Funds® and Fidelity Investments — to manage your education investment in a way that meets your savings goals and risk tolerance .
For help comparing 529 plans and Coverdell Education Savings Accounts or other education funding options, find a local agent.
1 Neither the company nor its agents give tax, accounting or legal advice. Please consult your professional adviser in these areas.