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How to Use a 529 Plan to Pay for College

Find out how using a 529 plan makes it easy to pay for the college of your dreams.

By
Laura Adams, MBA,
August 7, 2013
Episode #322

Page 1 of 3

Use a 529 plan to pay for collegeDoes the thought of paying for a child’s college education make you want to scream? If you’re struggling to pay down debt or save for retirement, having enough to also fund a kid’s college might seem like an impossible dream.

The good news is that saving even small amounts on a regular basis while children are young, can add up to a surprisingly healthy education fund. Today you’ll learn about my favorite place to set aside money for college so it can grow like Jack’s beanstalk: a 529 plan.

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If you’re waiting until your kids get accepted into college to figure out how to pay for it, you’re procrastinating an important financial planning task. Although parents are under no obligation to pay for a child’s college, I’ve rarely met any who don't want to contribute something.

What Is a 529 College Savings Plan?

The best way parents can save for college is to use a nifty, tax-advantaged account called a 529 plan. They’re offered by states and eligible institutions, like colleges, universities, or vocational schools that participate in federal student aid programs.

You contribute money that can be used to pay for a student’s qualified college expenses at an eligible school. Qualified expenses include tuition, books, fees, and equipment for coursework—plus reasonable room and board. The reason I love 529s is because the earnings on your contributions are never subject to income tax.

Although you can choose just about any 529 plan, you may also be eligible for additional benefits, like exemption from state financial aid calculations, if you choose a plan that’s sponsored by your home state.

Everyone can use a 529 plan because there are no restrictions on annual income. The maximum amount you can contribute each year varies on the plan you choose, but could be over six figures per student!

If you have the fortunate problem of contributing too much to a 529, you can change the student on the plan, who is called the designated beneficiary. For instance, if your daughter decides to go to a less expensive school, you could change the beneficiary on the account to your son, or to another member of the family who can use the balance to attend college.

However, keep in mind that if you withdraw money from a 529 and spend it on anything other than qualified education expenses...

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