What if the parents invest in their home state’s plan and the child decides to go to an out-of-state school?

No problem! The states offering prepaid tuition plans covering in-state tuition will allow you to transfer the value of your contract to private and out-of state schools. In the case of a 529 savings plan, the full value of your account can be used at any accredited college or university in the United States.

Are there any age or income restrictions in order to be eligible to invest in a 529 plan?

No! It doesn’t matter how much you earn or how old you are. Everyone is eligible to take advantage of a 529 plan. And the dollar amounts that may be invested are very generous. An individual can put $55,000 into a plan for each child and a married couple for instance, could invest $110,000 for each child. (However, in this case, the contributor must wait five years before additional contributions can be deposited). Grandparents may contribute to or open an account -- even unrelated individuals may do the same.

Who is in control of the account?

The owner of the account, who is typically a parent, is in control. This is in direct contrast to a custodial account like a UGMA, where the funds are legally owned by the child and fall under the control of the child when the age of majority is reached -- 18 years of age in many states.

In the case of a 529 plan, the owner may change the beneficiary of the account. Thus, if one child decides not to go to college, another individual (either another family member or close relative) may make use of the funds.

What happens if withdrawals are made that aren’t used for college?

Any earnings on withdrawals that are not used for college will be subject to taxes and a 10% penalty. The original principal is not subject to tax or penalty.

How will a 529 plan affect a child’s ability to qualify for financial aid?

Assets in a 529 savings plan are treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. This means that your expected contribution towards your child’s college costs will include 5.6%, or less, of the value of the account for each academic year. This is much better than the 35% assessment against assets owned by your child or in a custodial account like a UGMA.

A 529 prepaid tuition plan works differently in the financial aid formula. These assets do not have to be shown on the FAFSA form for financial aid. But when the benefits are paid out they are considered to be a resource that will reduce your child’s financial “need” in most cases, by the amount of the withdrawal. Thus, they will be eligible for less financial aid.

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