A 529 plan, sometimes known as a “qualified tuition plan,” is a savings plan that encourages you to save money for future college costs. An account holder (usually a parent or guardian) will establish the 529 plan for a student. There are two basic types of 529 plans:
- Pre-paid tuition
- College savings
A pre-paid tuition 529 plan allows the account holder to purchase credits from a participating college or university for future tuition. Some universities also allow you to purchase room and board. These plans are primarily sponsored by state governments, and thus have strict residency requirements for the account holder.
A college savings 529 plan is set up so that the account holder opens an account for the student, and funds will be used to pay eligible college expenses – generally at any college or university. College savings plans have different investment options: bonds, money market, stock mutual, and age-based portfolios.
Despite the many advantages of having a 529 plan, they were actually under threat for quite some time. As 529 plans are under government regulation, they can change pretty much at any given time. Most recently, the future of college savings plans were questionable, as new budgets were being considered, specifically involving the way 529 plans operate.
Potential Changes to College Savings Plans:
One of the primary benefits of opening a 529 plan is that the account is tax-free. This means that you don’t have to pay any income taxes on the account’s interests, dividends, or investment appreciations. In addition, 529 plan account holders are able to make withdrawals from the account without paying taxes on the withdrawal amount.
Yet, a 2015 government budget proposal was going to get rid of this benefit. Under the new budget regulations, withdrawals from 529 plans would no longer be considered tax-free and would instead be taxed in a manner similar to IRA tax rules. This new change would not apply to holders who already had a 529 plan, but new account holders would be subjected to the new taxing rules.
Looking To The Future With H.R. 529:
The administration’s budget proposal that included changes to 529 plans was not passed through government. In fact, lawmakers have actually begun the process of working on measures designed to enhance the value of your 529 plan.
Recently, the House of Representatives voted on H.R. 529. The bill, which passed in the House, makes 529 savings plans even more valuable and beneficial. There are three important advantages that H.R. 529 would add to college savings plans:
- College Expenses. Current 529 plan rules explicitly state what can and cannot be considered a “college expense.” Typically, most plans will only consider tuition, college fees, class materials, and room and board as appropriate educational expenses. These strict guidelines don’t include some important (though optional) expenses that college students must pay, like furnishing a room, meal plans, study material, or tutoring services. However, under the H.R. 529 bill, what qualifies as an educational expensive would extend to purchases like computers, computer software, and Internet access.
- Removal of Provisions. There are a lot of onerous and outdated 529 plan provisions that don’t necessarily benefit 529 plan account holders or beneficiaries. For instance, the current 529 plan law states that the account holder must calculate the money they withdrawal from multiple plan accounts and then determine if any of the money can or should be taxed. Yet, this provision rarely applies to any account holder. H.R. 529 responds to such provisions and removes them. With the eradication of such provision, H.R. 529 also ensures that if that tax-free nature of college savings plans are ever once again questioned, current accounts would not be subjected to any new taxing laws.
- Refunds. When you make a payment to a college or university from a 529 plan, it is possible to overpay. This means that you give the school more money than you owe. In effect, the school will send you a refund of the difference. With H.R. 529, refunds are able to be placed back into the 529 plan account. The bill provides a 60-day waiting period to transfer funds back into the 529 account, which is similar to the way IRA plans are regulated.
Things To Remember About The Future Of College Savings Plans:
Of course, H.R. 529 is not a law yet. The future of 529 plans is still technically in limbo, as the bill must also pass the Senate and then has to be approved by the President. However, if the House’s 401-20 vote that passed the bill is any indicator of what may occur in the Senate, it’s possible that we will see these new changes to 529 plans in the near future.
Regardless if changes do or do not occur, 529 plans are still advantageous – especially for college students. As the cost of attending college rises, students are faced with the difficult task of funding their education. A 529 plan helps lesson the pain of paying for college, and is a smart decision for ensuring an educational future.