529 Plans are tax-preferred savings vehicles for higher education costs. There are two types of plans: Prepaid Tuition Plans and Tuition Savings Plans. Prepaid Tuition Plans are plans that provide a guarantee that the value of the account will increase at the same rate as tuition. This allows a contributor to prepay a child’s college tuition at today’s prices or prices close to today’s prices.
On the other hand, Tuition Savings Plans allow the donor to make contributions to a state-sponsored investment account for the benefit of a selected beneficiary for purposes of funding their higher education costs. The account owner controls the account, not the beneficiary. The earnings on the contributions grow tax-free and are not subject to tax upon withdrawal provided that the funds are used for qualified education expenses and the provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 are still in effect.
Rollovers of 529 plans are permitted between certain family members should the beneficiary decide not to attend college or should surplus funds remain in the account after funding the expenses. However, if ultimate distributions exceed qualified expenses, or the donor makes withdrawals for non-qualifying purposes, earnings are subject to tax and a 10% additional penalty tax is imposed.
Limits, restrictions and costs of these plans vary among states. Check with your Ziegler financial advisor to ensure that you understand the plan requirements of your state.