What is a 529 Plan and Which Ones Are the Best

One of the best ways to save for college for your student is a 529 college savings plan. A 529 plan allows your family to sock away cash to pay for future educational expenses. Plus, your investment grows over time, usually at a rate that significantly beats traditional savings accounts.However, figuring out the best 529 plans isnt always easy. Luckily, there are ways to separate the okay options from those at the top. If you are wondering what a 529 plan is and which is the best 529 plan for you, here is what you need to know.Contents1 What is a 529 Plan?1.1 What is a 529 Prepaid Tuition Plan?1.2 What is a 529 Education Savings Plan?2 What Can I Use My 529 Plan to Pay for?2.1 What are the Penalties for Non-Qualified Distributions?3 Which State Has the Best 529 Plan?3.1 College 529 Education Savings Plans by State3.2 College 529 Prepaid Tuition Plans by StateWhat is a 529 Plan?To put it simply, a 529 plan is a savings vehicle designed specifically for educational expenses. They come with tax advantages when used for their intended purpose, which includes paying for college. Plus, they earn returns that more closely resemble other investment accounts, making them potentially more lucrative than a traditional savings account.These investment options were named after the Internal Revenue Codes Section 529. Created in 1996, the section allowed qualified tuition programs to achieve tax-free status, ensuring earnings were tax-deferred, and distributions were not taxed on the federal level when withdrawn for qualifying educational expenses.Unlike traditional investment accounts, 529 college savings plans are run at the state level. However, that doesnt mean you can only choose from those offered by your state. In fact, you can explore any that dont have residency restrictions, allowing you to find the best 529 plan for your needs.Every state offers at least one 529 plan. However, they dont all work the same way. Usually, each plan falls into one of two categories: pre paid tuition plans or education savings plans.What is a 529 Prepaid Tuition Plan?Prepaid tuition plans allow students and their families to buy credits or units that can cover tuition and fee costs at participating colleges and universities. These 529 plans give you the ability to purchase the credits based on todays prices instead of what college may cost in the future. This may or may not work in your favor since, if the cost of college goes down, you dont get any money back.Many prepaid tuition plans do have residency requirements, either for the saver or the beneficiary (the student who will be going to school). Additionally, your student might not be able to use this option to pay for other expenses, such as room and board, equipment, or supplies.What is a 529 Education Savings Plan?When people envision a 529 plan, they are usually picturing the education savings plan version. Education savings plans are more flexible than prepaid tuition plans these function like investment a ccounts.Typically, the saver chooses between a range of investment portfolio options, like mutual funds or exchange-traded funds (ETFs). Any returns on the investments are deposited into the account, possibly helping it grow over time.Like all investment accounts, these 529 plans come with a degree of risk. Your students portfolio may not experience gains and could even suffer losses. Before you open an education savings plan, you and your student need to determine how much risk you are comfortable with and select options that align with your preferences. Additionally, diversification is a must, as this prevents all of your proverbial eggs from being in one basket.It is easier to use a 529 education savings plan for a wider range of purposes. For example, your student can use 529 education savings plans at almost any college or university in the country, and a broader selection of expenses can be covered with the money. Residency requirements for opening an account are also less com mon, so you might be able to look at programs in other states.What Can I Use My 529 Plan to Pay for?Prepaid tuition 529 plans are fairly limited, covering only tuition and certain mandatory fees. Thats why many people consider the education savings plan version the best 529 plan when compared to the alternative.With the education savings plan, the money can also go to tuition and fees, just like a prepaid tuition plan. However, it can also cover much more, including:Room and boardOff-campus housing (up to an amount equal to the cost of room and board on campus)Books and supplies (only if they are required for your students classes)Computers and software (when required as part of your students education)Internet serviceSpecial-needs equipment and special-needs transportation (eligibility is determined on a case-by-case basis)There are a lot of common expenses that are not eligible under 529 plans. You cannot use a 529 plan to pay for the following without potentially incurring a pena lty:Transportation (non-special-needs)Student loan payments or interestSports and activity fees or equipment (not related to a class)Health insuranceBefore using a 529 plan distribution for any expense, it is wise for your student to speak with the school to determine if the item is actually considered necessary for their education. Otherwise, it may not be considered a qualifying expense, and that can lead to a tax penalty.What are the Penalties for Non-Qualified Distributions?If your student takes a 529 plan distribution and uses the money for a non-qualifying expense, the financial consequences can be severe. If the distribution is made up of earnings (not original contributions to the plan), it is taxed at the ordinary income rate, and there could be an additional 10 percent penalty.The saver can withdraw original contributions and not have to pay the penalty. However, that money is then taxed at the income rate, so there is a financial impact.However, there are some non-qualifi ed expense penalty exemptions too. For instance, if your student receives a scholarship, they might be able to avoid the 10 percent penalty for a non-qualifying 529 plan withdrawal, but might still have to pay income taxes on the money.Since your student can use scholarships to free up 529 college savings plan money, striving to land scholarships is a smart financial move.If you and your student want to learn more about scholarships for college students,attend our free college scholarship webinar! Head to http://thescholarshipsystem.com/freewebinar to sign up.Which State Has the Best 529 Plan?Since every state has at least one 529 plan available, figuring out which are the best 529 plans can seem like a daunting task. Luckily, there are a few standouts.Determining which 529 plan is best means you need to examine a few points. For example, lower fees, a higher number of investment options, strong oversight at the state level, and a good approach to asset allocation all play a role.Wh ile all of the 529 plans are worth exploring, here are a few that seem to be the best state 529 plans:Illinois: Bright Start College Savings ProgramNevada: Nevada College Savings PlansUtah: Utah Educational Savings PlanVirginia: Virginia529 inVESTHowever, it is still wise to review all of the available options. Some plans offer additional benefits to residents, which may make a difference for you and your student. Plus, this allows you to determine if your student is eligible for any particular option and if the alternatives may be the best 529 plan based on your familys needs.College 529 Education Savings Plans by StateAlabama: CollegeCounts 529 planAlaska: University of Alaska College Savings PlanArizona: Arizona Family College Savings ProgramArkansas: GIFT College Investing PlanCalifornia: ScholarShare College Savings PlanColorado: CollegeInvest Direct Portfolio College Savings PlanConnecticut: Connecticut Higher Education TrustDelaware: Delaware College Investment PlanDistrict o f Columbia: DC 529 College Savings ProgramFlorida: Florida 529 Savings PlanGeorgia: Path2College 529 PlanHawaii: Hawaiis College Savings ProgramIdaho: Idaho College Savings ProgramIllinois: Bright Start College Savings ProgramIndiana: CollegeChoice 529 Direct Savings PlanIowa: College Savings Iowa 529 PlanKansas: Learning Quest 529 Education Savings ProgramKentucky: Kentucky Education Savings Plan TrustLouisiana: START Savings ProgramMaine: NextGen College Investing PlanMaryland: Maryland529Massachusetts: Massachusetts U.Fund College Investing PlanMichigan: Michigan Education Savings ProgramMinnesota: Minnesota College Savings PlanMississippi: Mississippi Affordable College Savings ProgramMissouri: MOST 529 College Savings PlanMontana: Montana Family Education Savings ProgramNebraska: Nebraska Education Savings Trust Direct College Savings PlanNevada: Nevada College Savings PlansNew Hampshire: UNIQUE College Investing PlanNew Jersey: NJ BEST College Savings PlanNew Mexico: The Educ ation PlanNew York: New Yorks 529 College Savings ProgramNorth Carolina: College Foundation of North CarolinaNorth Dakota: College SAVEOhio: Ohio CollegeAdvantage 529 Savings PlanOklahoma: Oklahoma College Savings PlanOregon: Oregon College Savings PlanPennsylvania: PA 529Rhode Island: CollegeBound FundSouth Carolina: Future Scholar 529 College Savings PlanSouth Dakota: College Access 529Tennessee: TN Stars College Savings 529 ProgramTexas: Texas College Savings PlanUtah: Utah Educational Savings PlanVermont: Vermont Higher Education Investment PlanVirginia: Virginia529 inVESTWashington: DreamAhead College Investment PlanWest Virginia: SMART529 WV Direct College Savings PlanWisconsin: Edvest College Savings PlanWyoming: No state planCollege 529 Prepaid Tuition Plans by StateAlabama: Prepaid Affordable College Tuition ProgramFlorida: Florida Prepaid College PlanIllinois: College Illinois! 529 Prepaid Tuition ProgramMaryland: College Savings Plans of Maryland Prepaid College TrustMas sachusetts: Massachusetts U. PlanMichigan: Michigan Education TrustMississippi: Mississippi Prepaid Affordable College Tuition (MPACT) ProgramNevada: Nevada Prepaid Tuition ProgramTexas: Texas Tuition Promise FundVirginia: Virginia529 prePAIDWashington: Washington Guaranteed Education Tuition (GET)While choosing the best 529 college savings plan for your students education does take some time and diligence, it is worth the effort. That way, you can select the program that will meet your familys needs and provide you with the options and benefits you would like to have available.