Do’s and Don’ts of College Planning – 529 Plans

A more commonly known college savings plan is the Qualified Tuition Program or 529 plans.  What is less well known is there are 2 types of this plan under this program.

A lesser known program is the prepaid tuition plan.  Prepaid tuition plans allow you to buy future tuition at today’s prices.  With 6% inflation per year in college costs, locking in a price has some advantages.  The drawback is, knowing which college your child will want to attend.   Once you fund at a college, you are locked in – very few exceptions for refunds.

The more recognized 529 plans act similarly to the educational savings plan.  The contributions are not deductible.  But the earnings grow tax free.  The monies are withdrawn tax free if they are used for qualified college expenses and ONLY for college expenses.   If they are used for other purposes, the gains on the funds are included in taxable income and subject to a 10% penalty.

The amount you may fund is limited to the $14,000 annual gift tax exclusion.  Unless you select the 5 year election, then your maximum is $70,000.  The collective maximum you invest is determined by the program and may be as much as $300,000 per beneficiary.

Nearly every mutual fund family has a 529 program.  However, your state may have a specific plan.  For example, Idaho has the Ideal plan.  If you contribute under this program, you may deduct up to $8,000 per year on your Idaho income tax return.  You are restricted to the investment choices of the program.

The 529 plans maintain some flexibility.  There is no age restriction of when you have to use the funds.  Also, you can change the beneficiary on the plan to another family member.

One key to college planning is flexibility.  Life brings changes and you need to be able to adapt your plans.


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