In the spirit of back-to-school season, now is a good time to start thinking about saving for your child’s college education. Check out our college savings 101 guide to learn more about opening a 529 plan.

Frequently Asked Questions About 529 Plans

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings plan to help invest in your child’s higher education expenses whether that includes preparing them for college or a trade school. The plans vary from state to state, so check out the Pennsylvania 529 Plan (PA529 Plan) to determine the proper plan for your family as well as the tax benefits that you will incur.

What Is the Best 529 Plan?

There are two types of 529 plans: prepaid tuition plans and savings plans. Each option has over 100 plans available from which to choose, so take your time in deciding what works best for your family. If you cannot decide, you can save money in both types of accounts. Keep in mind that you can transfer plans at any time. You can also visit sites like Savingforcollege.com to help you make the best decision.

Who Can Contribute to a 529 Plan?

Parents and grandparents can contribute to a 529 plan to help boost the funds. Another great way to increase the amount in a college savings plan is to have friends and relatives gift money to a child for his or her birthday or other holiday that can be allocated to the 529 plan. Additionally, the beneficiary of a 529 plan can change to another eligible member of the family including a sibling or even oneself without tax penalties.

Are 529 Plans Tax-Deductible?

While the PA529 is not tax-deductible on your federal income tax return, it is deductible on your Pennsylvania state tax return. In addition, the growth in the account is also tax-free, which is an important benefit to families.

When Is the Best Time to Open a 529 Plan?

The best time to open a 529 plan is as early as possible. While it is ideal to start a plan when your child is born, don’t get discouraged if your child is already in junior or senior year of high school without any savings. Saving every little bit counts, even if you only contribute the minimum amount of $15 per month. Contribute as often as possible, though there is no requirement to contribute on a monthly basis.

Are There Any Restrictions on Using the Funds in a 529 Plan?

If you don’t use the funds in a 529 plan for qualified expenses such as college or trade school tuition and fees, housing arrangements, textbooks, supplies and computers, you will receive tax penalties for withdrawing the money. Nonqualified withdrawals will incur income tax and a 10 percent penalty.

Saving for your child’s future can raise numerous questions about what is the best route, but getting informed as soon as possible will help prepare you and your family for financial success.

 
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM