529 Plans

By Kevin Chambers

The increase in college tuition is mind-boggling. From 2003-2013, tuition at public four-year schools rose 5.2% a year beyond inflation[1]. Saving for college can be difficult, especially because keeping money in bank accounts gives you essentially no interest. There are several options to invest money for college, the most popular of which is called a 529 plan.

529 plans were created as a part of the Small Business Job Protection Act of 1996. 529 plans are provided by states, agencies, or educational institutions. 529 plans allow parents and grandparents to invest college savings for future use on education. Like an IRA, earnings on 529 plans accumulated on a tax-differed basis. Also, distributions that are used for education expenses are tax-free.

There are two types of 529 plans: prepaid tuition and college savings. Prepaid tuition plans allow the contributor to the plan to purchase credits in advanced for the beneficiary. This allows the contributor to essentially lock in the future cost of tuition. They pay the price for credits now, not the cost of credits when the beneficiary is in college. As the cost of higher education rises, this is a good way to save money on college tuition. The drawback is that these plans are specific to a certain institution.  If you buy credits at Oregon State University, for example, the credits are only eligible for use at Oregon State University. The credits are not transferrable. College savings plans are more flexible. They are investment accounts that allow contributions to be made on behalf of a beneficiary for use for educational expenses. 

What you need to know about 529 Plans:

• Anyone can establish a 529 plan on behalf of anyone else; however, some states restrict their use for state residents.
• The beneficiary can be changed at any time.
• 529 plans do not have any income restrictions.
• Contributions to a 529 plan must be made in cash. Contributing securities, such as stocks and bonds, is not allowed.
• Contributions to 529 plans are treated as gifts from the contributor and are subject to the federal gift tax limit ($14,000 currently).
• Some states also allow contributors to take a tax deduction for contributions.
• 529 plans can be used for many expenses associated with education: tuition and fees, books, supplies, equipment, tutoring, room and board, uniforms, transportation, and any other expenses that are required for the beneficiary to attend a qualified institution[2].
• Virtually all colleges, universities (even for-profit intuitions), vocational schools, and post-secondary schools qualify.

Headwater Investments has experience with a variety of 529 plans. If you have any more questions or want help setting up a plan, feel free to come and visit our office. Information on Oregon College Savings Plan (Oregon’s 529 plan), visit https://www.oregoncollegesavings.com/