About College Savings
Parents who make a plan to pay for college save twice as much as those with no plan. In light of this, it is a great idea to begin some saving now so that your student has an advantage later.
A 529 college savings plan is a state-sponsored, investment account for college. A 529 account allows you to save for a child’s (or adult’s) education with potentially much higher yields than a typical savings account, and enjoy some tax benefits. The Nebraska plan is called NEST, or Nebraska Educational Savings Trust.
States usually partner with an investment manager to provide underlying investments, which typically consist of mutual funds. The mutual fund offerings consist of stocks, bonds, cash, and other securities providing a mix of risk-based investment options ranging from aggressive to conservative. Many plans, including NEST, offer an FDIC, money market or guaranteed option designed to protect an investor’s principal while providing some investment growth.
How can the funds be used?
529 funds must be used for qualifying higher education costs. This money is specifically for college, trade school, books, room and board, and other college expenses. The funds can even be used for apprenticeship program expenses. You don’t necessarily have to go to college in the state where you have your 529 account. Funds in Nebraska’s 529 NEST accounts can be used at nearly all universities, community colleges, technical schools and graduate schools nationwide and some abroad.
Who owns the account?
An account owner is the person who manages and contributes to the account. The beneficiary is the student who will benefit from these funds. You may be a parent with a 529 plan (owner) that you started for one of your children (beneficiary). Perhaps a grandparent (owner) started one for the same beneficiary. There can be more than one account owner (and account) for each beneficiary. Each account owner can have accounts for several beneficiaries. An account owner can even have themselves as the beneficiary, although minors cannot own accounts. Account owners always remain in charge of how the funds are invested and withdrawn.
If the beneficiary later decides not to go to college – the account can be changed to another member of the beneficiary’s family. The funds can be left in for a later date – maybe if your child doesn’t go to college, your grandchild will. If you really want to withdraw the funds for something else (called non-qualified withdrawals), the earnings portion will be subject to tax (including 10% federal) and penalties.
Why should I open a 529 account?
A savings account may offer you a 1-2% return on your invested dollars, but 529 plans can offer higher returns based on fund performance. Plus, Nebraska’s NEST 529 plan has no minimum contribution amount – and no recurring contribution requirements (although, recurring contributions are a great way to make saving a habit).
The money you invest is tax-deferred (meaning you don’t have to pay taxes on the earnings as long as the funds are withdrawn for a qualified expense), so you can grow your savings significantly over time! And qualified withdrawals are not taxed when you use the funds for college-related expenses (like tuition, room and board, books, supplies, fees). Plus, Nebraska offers up to a $10,000 state income tax deduction for contributions account owners make to their NEST account. But be careful: Nebraska State tax deductions are subject to recapture when a participation agreement is canceled, the assets in an account are rolled over to another state’s plan, or when a Non-Qualified Withdrawal is made.
Will my child miss out on financial aid if we have a 529 account?
The 529 plan funds are currently reported as a parent asset on the FAFSA. But income typically has a greater impact when determining the financial aid your student will receive.
If someone else (like a grandparent) owns the account, the value of the account will not be listed as an asset on the FAFSA. But when the student receives funds from the account, this amount should be reported on the FAFSA. This could impact the expected family contribution.
Is it too late to start a 529 if my child is in high school?
While you may not benefit from the power of compounding interest over time, you could still reap the rewards of a tax benefit. If you are writing a check for a tuition bill, why not send that money through a 529 account, and get the tax advantage? (Remember: Nebraska account owners can deduct contributions made to their NEST account up to $10,000 per year; $5,000 if married filing separately).
Learn more about the NEST 529 program and how you can start saving for college.