How Do 529 Plans Work?
Let’s take a step back and understand what are 529 plans? There are 2 types of 529 plans: Education Savings Plans and Prepaid Tuition Plans. 529 plans are tax-advantaged savings plans to help save for education expenses. Fortunately, it is not limited to just higher education, and can be used for K-12.
This post is about how do 529 plans work.
Let’s dive into the top 5 features on how do 529 plans work:
1. Tax Advantage
As with other retirement accounts, there are certain tax advantages to 529 plans that include tax-deferred growth and withdrawals. Similar to Roth IRA, earnings grow tax-free and withdrawals for qualified education expenses are exempt at the federal level. However, state rules will vary by state
2. High Contribution Limits
Many states allow total contributions between $300,000-$500,000.
3. No Income Restrictions
Unlike Roth IRA, there are no income restrictions to contributing to a 529 plan, which means, it does not matter how much someone makes. Anyone can contribute to a 529.
4. Flexibility
A 529 plan is designed to be used for education expenses. These qualified expenses include tuition, supplies, and fees for college, vocational school, K-12, student loan repayment, and more.
5. Portability
What if you don’t use all of the funds? Don’t worry, 529 plans are quite portable! Starting 2024, you can actually roll over unused funds from a 529 plan into a Roth IRA. However, there is a limit of $35,000 per beneficiary.
To reiterate, the top 5 features of how do 529 plans work are:
- Tax Advantage
- High Contribution Limits
- Control and Flexibility
- No Income Restrictions
- Portability
There you have it! Interested in learning more about investing in a Roth IRA? Check this post out for Roth IRA Pros and Cons.
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