What are 529 Plans?
A plan named after a tax-code section for parents who want to save for college in a “tax-advantaged account.” This account has a variety of advantages over other kinds of college savings. The most significant benefits include its high contribution limits, tax-free distributions (for qualified educational expenses), and flexibility.
So it’s a tax-free account?
You are going to save post-tax, so it is different from an IRA in this respect. Some states do offer state tax deductions for contributions, and it grows tax-deferred. The government will limit the kind of expenses you can pay without worrying about taxes.
This is just another account I open at my brokerage account, right?
No. Different states have different plans that vendors run. California, for example, has a “scholarshare plan.” You can shop around in other states, however.
If I have a high income, I cannot do this, right?
There are no income restrictions.
How much can I contribute?
There is an “aggregate limit” to what you can have in a 529 plan, based on the projected costs of education. The limits are in the hundreds of thousands of dollars in all states but vary. Also keep in mind larger gifts (above the year’s annual exclusion amount) will trigger the need to file a form 709 with the IRS.
Can grandparents contribute to a 529?
I have no idea if my child will go to college or graduate school, or get a scholarship, or who may need the money for education. Maybe I should not lock myself in like this?
One of the advantages of a 529 plan is that you can change beneficiaries during your lifetime. So if one child does not go to college or goes to on a full scholarship, you can transfer the benefit to another child. You can even get your money back (there are disclaimers here).
How does this work in Islam? Is it a gift, or a wasiyah, or does it count towards Islamic Inheritance?
For Islamic purposes, it is your money. As a result, it is subject to the Islamic Rules of Inheritance.
So it gets distributed based on what is in my Islamic living trust or will?
In general, we recommend the account owner of the plan is the trustee of the living trust so a successor Trustee can appropriately distribute it to the proper beneficiaries.
Does this account count as being my child’s assets for purposes of applying for financial aid?
No. The funds in the account will be the parent’s assets for those purposes.
Can I invest these funds however I want?
No. The plan often offers a selection of mutual funds. You cannot invest it in your own business or stocks, or other securities of your choice.
Do any of these plans have Sharia-Compliant mutual funds?
Not that I have seen. These plans are designed without Muslims specifically in mind, limiting their utility for Muslims who want halal investment choices.
Are there other ways to save for college without a 529 plan?
Yes. You can save in a taxable investment account. You would be liable for taxes on capital gains and income, but you get to decide how to invest the funds. There are also other accounts you can set up like a Coverdell Education savings account at most any brokerage. The Coverdell suffers from small contribution limits and restrictions. It is used for education expenses before college, however.
You can also save in a custodial account for your child, called a “UTMA” or “UGMA” account. These are taxable accounts. For Islamic Inheritance purposes, such assets are your own.