What Is a 529 Plan?<\/h2>\n
A 529 plan is an investment account specifically designated for education expenses. This could include the cost of college or university, vocational school, apprenticeship programs, K-12 education, and student loan repayments.<\/p>\n
A 529 plan can be started by the beneficiary (aka the future student) or it can be started by a family member or friend on behalf of the beneficiary. This is usually a parent or grandparent, but it doesn\u2019t have to be.<\/p>\n
There are two primary types of 529 plans: college savings plans<\/strong> and prepaid tuition plans<\/strong>.<\/p>\n The most common type of 529 plan is a college savings plan. This type of account can be used for any eligible, accredited post-secondary institution, including a two-year or four-year college or vocational school. It can even be used for student loan repayments.<\/p>\n Contributions to a 529 college savings plan are made with after-tax dollars. That means that these contributions come from income after any federal or state taxes are deducted. But the growth<\/em> on those contributions is tax-deferred<\/strong>. So as the account grows, you do not have to pay additional taxes on those earnings. And when you withdraw the funds to use for qualified educational expenses, you don\u2019t have to pay any income taxes on that money. Pretty neat!<\/p>\n You may also qualify for a state tax deduction based on your contributions. These amounts vary from state to state, so check with your state\u2019s tax authority.<\/p>\n When it\u2019s time to go to school, the money in a 529 plan can be spent on \u201cqualified education expenses.\u201d<\/a> That may include tuition and fees, books and materials, room and board, and supplies\u2014when they\u2019re a required expense of participating in class. That means that students studying in online culinary school,<\/a> pastry school<\/a>, or plant-based culinary school<\/a> at Escoffier can pay for their laptops, internet access, and ingredients for their assignments with their 529 funds! Check with your specific plan for more guidelines on what is included.<\/p>\n With a prepaid tuition plan, you can do just that: pay for college tuition in advance. With this type of account, you buy \u201cunits\u201d or \u201ccredits\u201d to be applied to college tuition later. But you buy them at today\u2019s<\/em> rates, instead of the rates at the time the student attends school. With the rapidly increasing costs of education, this can be a great way to save on future school expenses!<\/p>\n Once you\u2019ve purchased your units, the plan administrator will invest those funds so they continue to grow in the intervening years. And they have the same tax-free growth and withdrawals as a college savings plan.<\/p>\n There are limitations to the prepaid tuition plan model, which may make this a less appealing choice for some. To start, these plans are usually sponsored by state governments. So they may be limited to public in-state schools. And they can only be used for tuition and fees, not for additional costs like books, supplies, and room & board. As of February 2023<\/a>, the following states offer prepaid tuition plans that are open to new enrollment:<\/p>\n You can get links to your state\u2019s college savings plans and\/or prepaid tuition plans at www.collegesavings.org<\/a>.<\/p>\n There is also the option to begin a Private College 529 Plan<\/a>. This plan is not limited to a specific state and can let you prepay tuition at nearly 300 private colleges across the country. While you don\u2019t have to choose your school at the time you open the account, you are limited to the schools that participate in the plan.<\/p>\n What do we mean when we say \u201cinvestment account?\u201d<\/p>\n An investment account holds stocks, bonds, mutual funds, and other assets. As those assets grow, so does the value of your account! But the value of those assets can also decline.<\/p>\n Examples of investment accounts include IRAs and 401(k)s for retirement, 529s for education, and standard brokerage accounts that aren\u2019t earmarked for any particular use.<\/p>\n Investing<\/em> is different than saving<\/em>. A savings account stays relatively static, only earning modest interest. An investment account, on the other hand, has the opportunity to grow much more over the same period of time, as the value of stocks and bonds increases. Plus as your balance grows, you accumulate more earnings as both your contributions and the dividends\/interest that you earn are invested in more assets. This is called compounding<\/strong> and it can account for impressive growth over time.<\/p>\n<\/div>\n<\/div>\n A 529 plan is earmarked for qualified education expenses at eligible schools. And that may include certain culinary school<\/a> and trade school programs, including those at Auguste Escoffier School of Culinary Arts!<\/p>\n Schools must be accredited<\/a> to be eligible for funding through a 529 plan. Accreditation is how schools verify that they meet certain standards of curricula and rigor. Escoffier\u2019s Austin and Boulder campuses (including online programs available through our Boulder campus) are both nationally accredited!<\/p>\n You can do a quick search<\/a> for the schools you’re considering to see if they qualify.<\/p>\n So why go to the trouble of setting up a 529 plan? Here are the benefits of this type of school-specific investment plan.<\/p>\n With any investment account, including a 529 plan, you can put your money to work. Investments in stocks, bonds, mutual funds, and commodities (like gold and other precious metals) have the potential to grow significantly over time.<\/p>\n Consider two different circumstances. Mary plans to save money for her daughter for school for the next 10 years. She plans to set aside $200 per month. If she puts that $200 into a savings account with a 0.23% interest rate (the average rate as of February 2023<\/a>), she would have $24,454.58 for her child. And $24,000 of that is what she contributed. So she only earned $454.58 in interest.<\/p>\n Now let\u2019s say she instead decides to set up a 529 plan. It\u2019s impossible to say exactly how her investments will perform. But if we assume a modest 5% rate of return, Mary may have $30,512.72 at the end of 10 years. So she earned $6,512.72\u2026by contributing the exact same number of dollars.<\/p>\n That means the 529 plan would have earned over 14 times the amount of the savings account!**<\/p>\n Do the math. A 529 plan may help you save on college costs and taxes.<\/p><\/div>\n In the example above, Mary has earned over $6,500 for her child\u2019s education. She has already<\/em> paid income taxes on the $24,000 that went into the account. And she will not have to pay any income taxes on that $6,500 that she earned. That\u2019s because the money earned in a 529 plan is not subject to income tax or capital gains tax.<\/p>\n This is one of the reasons that people choose to start 529 plans for education expenses, instead of a more flexible brokerage account. The income from a brokerage account is usually subject to income tax and\/or capital gains tax.<\/p>\n Of the 42 states<\/a> that require state income tax, 36 offer some kind of tax deduction for 529 contributions. So in addition to earning more on your investments, you may be able to save<\/em> money on your state taxes.<\/p>\n Note that most states that offer a deduction only do so when you participate in the state\u2019s 529 plan.***<\/p>\n It\u2019s very common to have a 529 plan and still<\/em> need some outside funding for college. So you may be wondering how this type of plan could impact your eligibility for financial aid.<\/p>\n There are many factors that go into the impact of your plan on your financial aid package, including who owns the plan (the student, parents, grandparents, extended family), and how much it\u2019s worth. For example, if a parent owns the account on behalf of their child, the full value of the account must be reported on the Free Application for Federal Student Aid (FAFSA\u00ae)<\/a>. Around $10,000 in the account is generally disregarded in the financial aid calculation. For the remainder, a maximum of 5.64%<\/a> of the account is subtracted from the financial aid package<\/a>. That means for an account of $15,000, a student\u2019s financial aid package could be reduced by $282 (5.64% of $5,000).<\/p>\n But this is only the case when the 529 plan is owned by a student or parent. If it\u2019s owned by a grandparent or other family member, the distributions from the plan must be reported on the student\u2019s FAFSA\u00ae. And this could have a greater impact on the student\u2019s financial aid eligibility. (But good news for grandparents\u2014the rules are expected<\/a> to change for the 2024-2025 school year, with grandparent-owned 529s treated more like parent-owned 529s!)<\/p>\n If these parents start 529 plans for their young kids, the impact on their future financial aid eligibility may be low.<\/p><\/div>\n Unlike some other types of investment accounts (like IRAs, for example), there are no annual contribution limits to a 529 plan. But<\/strong> a 529 contribution is considered a gift by the IRS. Any gift over the federal threshold of $17,000<\/a> (for the 2023 tax year) will trigger a federal gift tax. So many 529 contributors keep their annual contributions under that threshold to prevent the tax.<\/p>\n These plans also usually have a total<\/em> contribution limit<\/a>. The amount varies from state to state, but the limits range from $235,000 in Georgia and Mississippi to $550,000 in West Virginia.<\/p>\n If you want to use your funds for something other<\/em> than education expenses, you can. BUT your distributions could be subject to normal income taxes and<\/em> a 10% tax penalty<\/a>, depending on where you live. So think it through! Depending on the size of the account, that could be a large loss.<\/p>\n There may be some exceptions to the penalty, like:<\/p>\n 529 plans are often started by parents for their kids. With a long runway ahead of them, the growth on a 529 plan can be substantial between the child\u2019s early years and when they\u2019re ready for college.<\/p>\n But these plans aren\u2019t just for kiddos! Anyone considering going back to college or graduate school can open a 529 college savings plan. They can earn some extra money for their education and save on taxes all at the same time. Since these plans compound over time, the longer the plan has to grow, the better.<\/p>\n And if the saver changes their mind about going to school, they can transfer the funds to another 529 account for their kids or spouse. And if the new beneficiary has already attended college, they can use those funds to pay off their student loans.<\/p>\n There are age limits to some state 529 prepaid tuition plans, so check the rules in your state\u2019s plan.<\/p>\n There is no age limit for 529 college savings plans! So older learners can still reap the benefits.<\/p><\/div>\n A 529 could be just one part of the overall financial plan<\/a>. Between an investment account, scholarships<\/a>, military or veterans benefits<\/a>, and student loans<\/a>, students may be able to assemble all the funding they need to achieve their education goals if they apply and qualify. If you have questions about funding your education<\/a>, we\u2019re here to help. Contact our Financial Aid department<\/a> to get answers to your questions and bring culinary school within reach!*<\/p>\n To learn more about financing your culinary school education, try these articles next:<\/strong><\/p>\n *Information may not reflect every student\u2019s experience. Results and outcomes may be based on several factors, such as geographical region or previous experience.<\/em><\/p>\n **529 plans may incur fees, so always read the fine print before starting any new financial plan.<\/em><\/p>\n ***Always consult a tax professional for specific information on deductions.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" College tuition costs are rising fast\u2014but you can be prepared with a 529 plan! Learn about the potential savings this financial tool offers.<\/p>\n","protected":false},"author":23,"featured_media":26243,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1308],"tags":[94],"class_list":["post-26242","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financing-your-education","tag-financial-aid"],"acf":[],"yoast_head":"\nCollege Savings Plan<\/h3>\n
Prepaid Tuition Plan<\/h3>\n
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Investment Accounts, Explained<\/h3>\n
Can You Use a 529 Plan to Pay for Culinary School or Trade School?<\/h2>\n
What Are the Benefits of a 529 Plan?<\/h2>\n
Investments Grow Over Time<\/h3>\n
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Investment Growth Is Tax-Free<\/h3>\n
Some States Offer Tax Deductions for 529 Contributions<\/h3>\n
529 Plans May Have a Modest Impact On Financial Aid Eligibility<\/h3>\n
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How Much Can You Contribute to a 529 Plan?<\/h2>\n
Common Misconceptions About 529 Plans<\/h3>\n
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What If You Want to Use 529 Funds For Non-Qualified Education Expenses?<\/h2>\n
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Who Should Consider a 529 Plan?<\/h2>\n
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Consider Adding a 529 Plan to Your Financial Strategy!<\/h2>\n
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