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Saving for Education: 529 Plans in California

If you’re looking for a way to help fund your child or grandchild’s education, a 529 plan may be a good option. 529 plans are offered throughout the U.S., and each plan’s requirements vary by state. They are a tax-smart way to start a college fund because the funds grow tax-deferred; as long as they are used for educational purposes, withdrawals can be made tax-free.

Types of 529 Plans

There are two types of 529 plans, but the 529 savings plan is more common. Each of the 50 states and the District of Columbia sponsor a 529 savings plan. In this type of 529 plan, portfolios can be a mixture of stocks and bonds, and mutual funds. As with any investment, risk tolerance and time horizon should be considered. 529 savings plans do not depend on residency; for example, if you live in California, you can use California’s ScholarShare529 plan, but you can also opt for another state’s plan if that fits your needs.

The other type of 529 plan, a prepaid tuition plan, allows for contributions to be made at current tuition rates to help pay for future education costs. Payments can be made in one lump sum or several installments to cover one up to five years of tuition. Unlike 529 savings plans, only nine states currently offer prepaid tuition plans. Unlike the savings plan, you would need to be a resident of the state at the school your beneficiary plans to attend.

How can a 529 plan be used?

529 plans can be used for qualified expenses from kindergarten through graduate school. Anyone can open a 529 account, including students who are at least 18 years of age and organizations like a 501(c)(3), who may use the account to fund scholarships. However, typically, they are set up by parents or grandparents for designated beneficiaries.

In addition to tuition payments ($10k/year for K-12 students), qualified expenses for a 529 plan include:

  • Fees, books, supplies, and apprenticeship program equipment
  • Room and board
  • Up to $10k of student loan debt (lifetime amount)

 If the 529 plan is not used for qualified expenses, a 10% penalty fee will be incurred.

What happens if a 529 plan is not used?

As of 2022, the SECURE Act 2.0 stated that unused funds up to $35k (lifetime) from a 529 plan could be transferred to a Roth IRA in the beneficiary’s name, with a few conditions. The 529 accounts must have been open for at least 15 years, and transfers can only be made after annual limits to the Roth IRA have been contributed.

Discuss your 529 plan options with Chatterton & Associates

529 plans can be a great tax-saving option to make a positive financial impact on your child or grandchild’s education. If you have questions about how to set up a 529 plan in California for a designated beneficiary or which 529 plan may be right for you, contact the financial and tax professionals at Chatterton & Associates to discuss.

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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