As the cost of education continues to rise, many families are looking for ways to save money for their children’s college education. One popular option is a 529 plan.

What is a 529 plan?

A 529 plan is a tax-advantaged investment account that is designed to help families save for their children’s education. The name “529” comes from the section of the Internal Revenue Code that governs these accounts.

529 plans allow plan owners to invest money in a variety of investment options, such as mutual funds, with the goal of accumulating money to fund future education expenses.

How do 529 plans work?

529 plans work much like other investment accounts. Contributions are made to the account and those contributions are invested in the investment options selected by the account owner. Investment earnings grow tax-free so long as withdrawals are used to pay for qualified education expenses. There is an account owner and a beneficiary. The account owner is usually a parent, grandparent, guardian, or relative of the beneficiary, who is the student.

Qualified education expenses include things like tuition, fees, room and board, computers, and textbooks. Recently, 529s allow for up to $10,000/year toward a child’s K-12 tuition. Previously the plans could only be used for college.

Each state has its own 529 plan, and you can choose to invest in any state’s plan, regardless of where you live or where your child plans to attend college. However, some states offer tax incentives for residents who invest in their state’s plan, so it’s worth considering your home state’s plan as well. For example, a PA resident who funds a PA 529 plan may be eligible for a PA state tax deduction.

What are some other benefits of a 529 plan?

There are no income limits for contributors. This means that anyone can contribute to a 529 plan, regardless of their income.

529 plans are flexible. If a beneficiary does not use any or all the funds within the 529 plan, the account owner can change the beneficiary to another child or individual (including the owner) without penalty.

A 529 plan can be a great way to save money for achild’s education. With tax advantages, high contribution limits, and flexibility, it’s worth considering as part of your overall education savings plan. RTD advisors are well versed in 529 plans and can help determine the best option for you and your family’s goals.