AKA ‘a qualified tuition plan’ – A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Usually a college fund!
The 529 plan can be set up by a parent and designate a child as the beneficiary of the account. And fun fact – you don’t have to wait until a child is born to start saving money for their education! You can start a 529 plan with yourself as the beneficiary and then add your child as a beneficiary when they are born. There are annual limits on how much you can put in a plan for someone else without paying a gift tax but for the most part, you can contribute what you want.
It is important to note that 529 plans are considered in financial aid packages. This means that your child could receive less financial aid for having money in a 529 plan. Not all savings vehicles are like this. For example, financial aid does not look at ROTH IRAs and you can withdraw this money to pay for education penalty free.
In addition, you will have to pay taxes on the money if it is withdrawn for a purpose other than the intended purpose.
Interested in learning about other ways to pay for school? Check out our episode with Nikki Wells on different ways to fund college education.