College savings plans are a type of 529 college savings program. These plans allow you to save tax free for a student’s qualified higher education expenses at any eligible educational institution.

The general rules

Qualified higher education expenses include tuition and fees, books and supplies, and room and board for students enrolled at least half time.

Eligible educational institutions are defined as any college, university, vocational school, or other accredited postsecondary institution eligible to participate in a student aid program administered by the Department of Education. According to the IRS, this includes virtually all U.S. accredited public, nonprofit, and privately owned profit postsecondary institutions.

The amount you can contribute to a college savings plan varies by state. Each state sets its own lifetime contribution limit per beneficiary, with limits generally ranging from about $180,000 to $300,000.

Fees vary greatly among college savings plans, as well as within each plan. That’s why the FINRA, the self-regulatory organization for the U.S. securities industry, advises investors to take fees and expenses into account when choosing a plan. The FINRA emphasizes that even small differences in fees and expenses can make a big difference in the value of your investment over time.

How college savings plans work

College savings plans provide variable rates of return based on the types of investments you choose from the available options. Therefore, your account value may increase or decrease based on the performance of your selected investments.

Investments, which vary from plan to plan and by law are restricted to include only a limited number of  broad-based investment strategies, are managed by outside investment companies. Investments generally include stock, bond, and money market mutual fund options, as well as age-based portfolios of mutual funds.

These investments provide no return guarantees and account values may be more or less than the amount you contribute; plan stock and bond mutual funds gain and lose money just like other mutual funds. Investments are not insured or guaranteed by the state, any investment company, or any government agency.

Some plans also provide investment options designed to preserve your principal and provide a fixed minimum rate of return.

The investment rules

You can only change investment options within the same plan once in a calendar year (assuming the plan permits this change). If you already made this annual change and you want to change your investments again, you can direct future contributions to different investments if you open a separate account for the same beneficiary (subject to the plan’s lifetime contribution limits).

You can also change your investments if you change your account beneficiary.

Another way to change investments is to roll over your plan assets to another college savings plan for the benefit of the same beneficiary. You can make this rollover free from federal income taxes and penalties as long as you limit transfers to one within any 12-month period. Before you make this move, however, check into any state tax consequences.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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