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Did you know that, according to the College Board, the average cost of college tuition and fees in 2018 was a whopping $34,740 at private universities and $9,970 for public colleges?

Even though higher education may be costly, setting up a 529 is a fantastic way to save money for college. Planning ahead with our college savings calculator can help you determine the total cost of college and how much to put away each month.

Below, we get into everything you need to know about college savings plans and the 529 contribution limits.


What is a 529?

In a nutshell, it's a college saving plan exempt from federal taxes.

Any American over the age of 18 can open an account and set a beneficiary. If you are an adult and planning to return back to school, you can even open one up for yourself.

529 plans are state-sponsored, but you don't need to invest in your own state's plan. It's smart to shop around and compare different state plans to determine what's best for you and your family.

Some states offer prepaid plans, which allow you to essentially prepay tuition at a locked-in present-day rate for an in-state, public college.

This is only beneficial if you're positive your child will attend this type of school.

For 529 plans, the account holder has the control of the funds. That means you can withdraw funds at any time. The beneficiary, on the other hand, does not have control over the money.

The account holder can also change the beneficiary on the 529 account at any time. For example, if your child receives a full-ride scholarship, you can use the funds for his or her sibling.

How do I pick the right 529 plan?

Like with any investment choice, navigating the best 529 plan requires planning and research.

Tax Breaks

Most states allow you to deduct the contributions made to in-state plans.

These deductions do vary, so you'll want to compare different states to make sure that you're maximizing these benefits.

Hire an Advisor

If you want to take a more hands-off approach, using a financial advisor may be best.

While these may cost more in commission, you won't have to worry about managing the funds and choosing the best investments.

DIY Investing

If you're willing to engage in some basic research and planning, you don't need a financial advisor for your 529.

Try out our college savings calculator to get an idea of how much you should be saving to reach your goal.

Then, pick a target date fund for your child's anticipated college years and leave it to grow.

What can 529 funds be used for?

You may use 529 funds for most higher education expenses such as:

  • accredited colleges
  • graduate schools
  • trade schools
  • tuition
  • books
  • room and board
  • electronics (laptops, printers, etc)

Since 2018, parents can use 529 funds for private elementary and high school tuition too. Parents may withdraw up to $10,000 per year on tuition costs.

Finally, you can make withdrawals outside of higher education expenses. However, any of these withdrawals are penalized with a 10% fee and ordinary income taxes.

What are the 529 contribution limits?

Unlike most tax-deferred accounts like the Roth IRA or 401(k), the IRS has not specified particular contribution limits for 529 plans.

Under federal law, the 529 plan balances cannot surpass the intended and expected cost of higher education expenses. Each state determines its own limits. They can range from $200,000 to $500,000.

The state configures what they assume will be the maximum cost of attending an expensive college and graduate school.

With that said, individuals don't need to worry much about going over the limit. Funds can stay in 529 accounts without penalty.

If you have met the limit, you just won't be able to make contributions unless a market drop decreases the account balance.

In 2019, gift contributions up to $15,000 will qualify for the annual exclusion. That means you, as an individual, can "gift" up to $15,000 tax-free to any 529 accounts.

If you contribute more than that, you might owe gift tax.

What about other college-saving plans?

The 529 plan is not the only option for families preparing for college. You may want to consider looking into alternative investment options.

UGMA Custodial Account

This is a custodial account where the beneficiary (the child) owns the assets.

This type of account benefits the giver for tax and estate benefits. Furthermore, the custodian may sell assets for the child's benefit at any time.

Coverdell Education Savings Account

Money in these accounts grow tax-free, but contribution limits cap at $2,000 per year. You can use the funds for any qualified education expenses from elementary school through college.

Once the child reaches age 18, he or she has full control over the account. This means the child can do whatever he or she wants with the money.

Only couples with adjusted gross incomes of less than $220,000 can open this account. For individuals, the number is $110,000.

The account also must be liquidated by age 30.

High-Yield Savings Account

Although it is typically one of the "safest" choices, high-yield savings accounts are typically not appropriate for college preparation.

Today, most savings accounts do not accrue high enough levels of interest to offset inflation.

In fact, you may be actually losing out on money by stashing it away in the bank. If you have a very young child, your money will stretch much further if you choose to use the funds for investing purposes.

Whatever you decide, run some numbers through our college savings plan calculator to get an idea of what you can accomplish.

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