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The most important 529 plan rules deal with contribution amounts, annual income, withdrawal procedures and allowances, taxes, and qualified education expenditures. Parents, relatives, or other people who oversee a 529 savings plan should familiarize themselves with these rules in order to take full advantage of this college savings tool. Most 529 plan rules have minimum and maximum contribution amounts, and each set of 529 plan rules also dictates withdrawal procedures, tax policies, and qualified education expenditures when it comes time to withdraw from the fund for college attendance.
People who setup a 529 savings plan should be aware of the contribution rules dictated by the plan's policies. Some plans have a minimum contribution of as little as $25 US Dollars, while others require a larger minimum contribution. Likewise, many plans have contribution maximums. In most cases, these maximums are determined by the state that oversees the plan. Each state may impose a maximum overall contribution limit, meaning that once the total value of the plan reaches a certain amount, no future contributions are allowed.
Individuals contributing to a 529 savings plan are not restricted based on their annual income. Parents should be aware, however, that the amount of money in a 529 savings plan is considered part of their overall assets when the federal government determines financial aid eligibility. Some students may forfeit federal financial aid that they would otherwise qualify for, depending on the value of the 529 savings account and other assets.
Withdrawal procedures and allowances are other important 529 plan rules that people should understand clearly. If the proper procedures are not observed, the beneficiary of the 529 plan may have to pay a penalty on the funds he or she withdraws. This fee is typically ten percent.
There are also important tax implications associated with 529 savings plans. The tax benefit is one of the reasons why this type of college savings plan is so popular. Like many retirement or college savings options, however, each 529 plan has different rules for who can contribute, how much they can contribute and claim as a deduction on their taxes, and what the exact rules or tax benefits are for that individual.
When it comes time to use the 529 savings plan to pay for college expenses, it is important to understand the rules for what constitutes a qualified education expenditure. Most 529 plan rules provide a list of expenditures that can be offset using funds from the 529 account. Using the 529 plan funds for expenses not included on the list can result in significant penalties.