As the cost of higher education rises, a lot of people are looking for a way to grow their savings quickly so that they can pay for it. A lot of these families have turned to the 529 college savings plan to save for college. A lot of other families, however, are asking what is 529?
A 529 plan is a unique type of savings account where the money is designated for college expenses. The rules for the plan can be found under section 529 of the IRS tax code. According to these regulations, all money that is deposited into a 529 college savings plan can grow tax-free. It is important to note, however, that funds in a 529 plan can only be used for specified educational expenses. Typically this includes tuition, room and board, and class fees at nationally accredited universities, colleges, or vocational training programs. But, what is 529?
According to 529 plan history, the funds were first created in the early 1990s as a way to help families that would otherwise not qualify for financial aid save for college expenses. Saving in a 529 can be done by any relative or friends of the student, and it can start years before that student is ready for college. Over the course of 529 plan history, determining how much a student should have saved has been the biggest challenge for most families. There are a few online calculators that can be used to project college costs and the amount that families will need to save to get there. These calculators are often part of websites that sell investments that can be put into the plans.
A 529 account can hold a variety of investments, including stocks, corporate and government bonds, CDs, and cash. All money that is deposited into a 529 will have been taxed by the federal government first (and really, what isn’t?). All investment gains that the money makes while in the account, however, are not taxed. Furthermore, as long as the money is used for qualifying higher education expenses, the money that is pulled out of the account will not be taxed either.