Guide to 529 Plans
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What Is a 529 Plan?
Prepaid Tuition Plan
Education Savings Plan
How Do 529 College Savings Plans Work?
Can You Withdrawal From Your 529 at Any Time?
What Expenses Can a 529 Plan Be Used For?
Qualified Higher Education Expenses
Student Loan Debt
What Happens If Your Child Doesn't Go to College?
Pros and Cons of a 529 Plan
Less need for student loans. The more you can save through a 529 college savings plan, the fewer student loans you’ll need to borrow. Graduating with less or no education debt means fewer years spent repaying private or federal student loans. Tax advantages. Earnings in the account can accrue tax-free, and distributions that cover the cost for qualified higher education expenses and K-12 tuition aren’t taxed. Additionally, beneficiaries don’t typically need to report 529 plan distributions as income on their income tax returns. Flexible covered expenses for certain 529 plans. Allowable uses for 529 plans are for primary and secondary tuition, and includes student loan repayment for the beneficiary and their siblings up to a lifetime distribution limit. Changing beneficiaries is straightforward. Account owners can change the beneficiary easily, if needed. Such as if a child no longer plans on going to college, or has received a full scholarship and no longer needs the funds.
Funds can only be used for education. 529 plans can only be applied toward qualified higher education expenses, or tuition for primary or secondary school. Recent legislation also allowed up to $10,000 in lifetime disbursements for the beneficiary, and an additional benefit for each sibling, but otherwise, use cases are limited. Certain non-qualified withdrawals incur tax penalties. If funds are drawn for an expense that doesn’t meet the plan’s rules, it’s subject to state and federal income taxes and you’ll incur a 10% federal penalty on your earnings. Investment options might be limited. You’re limited to the investment options that are offered through the plan, and you’re restricted in the number of times per year you can change your investment option for education savings plans.
3 Student Loan Tips
Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options. Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.) If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for federal student loan forgiveness.
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