Many individuals welcome babies into the world during their fellowship. This past year, members of my fellowship welcomed six little ones, including two sets of twins. A new baby means new financial constraints and different options for financial planning into the future. College savings is a key component of financial planning for your children. One of the most utilized forms of college saving is the 529 plan.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses. It is named after Section 529 of the Internal Revenue Code, which governs these plans in the U.S. These plans are typically sponsored by states or educational institutions and come in two main types: college savings plans and prepaid tuition plans.

College Savings Plans: With college savings plans, contributors can invest money in a variety of investment options, such as mutual funds or exchange-traded funds. The funds in the account grow tax-free, and withdrawals are also tax-free when used for qualified educational expenses such as tuition, fees, books, and room and board.

Prepaid Tuition Plans: Prepaid tuition plans allow parents or guardians to pay for future college tuition at today's prices. These plans are usually sponsored by state governments and guarantee that the beneficiary's tuition will be covered when they attend an eligible in-state public college or university.

Several benefits of 529 plans include tax advantages, high-contribution limits and flexibility in choosing beneficiaries. While contributions to 529 plans are not tax-deductible on the federal level, some states offer tax benefits to residents who participate in their sponsored plans.

One important caveat is that you can open a 529 plan in any state, regardless of where you reside. Each state offers its own 529 plan(s), and you are not limited to participating in the plan offered by your state of residence. This means you have the flexibility to choose a 529 plan from any state that best meets your preferences and needs. However, it's essential to consider certain factors when selecting a 529 plan:

Tax Benefits: Some states offer tax deductions or credits for contributions made to their sponsored 529 plans. If your chosen state provides tax incentives, it may be advantageous to consider your home state's plan to maximize potential tax savings.

Fees and Expenses: Different 529 plans may have varying fees and expenses, such as administrative fees and investment management fees. It's crucial to compare the costs associated with each plan to ensure they align with your investment goals.

Investment Options: The investment options available within each 529 plan can differ. Consider the types of investments offered and how well they align with your risk tolerance and investment preferences.

Plan Features and Benefits: Some 529 plans may offer unique features such as scholarship opportunities, online tools or extra benefits for in-state residents. Evaluate these features to determine which plan aligns best with your needs.

Lastly, you may be wondering: What if your child doesn't go to college or doesn't need all the funds in the 529 plan? You do have a few options for handling the money:

Change the Beneficiary: You can change the beneficiary of the 529 plan to another eligible family member, such as another child, sibling, cousin or yourself. This way, the funds can still be used for qualified education expenses without incurring taxes or penalties.

Keep the Account for Future Use: You can keep the 529 account open in case your child decides to pursue higher education at a later time. There is no age limit or time restriction for using the funds in a 529 plan, so they can remain invested and grow tax-free until needed.

Use the Funds for Non-Qualified Expenses: If you decide not to use the funds for education expenses, you can still withdraw the money. However, in this case, the earnings portion of the withdrawal will be subject to both federal income tax and a 10% penalty tax. Only the original contributions can be withdrawn without penalties or taxes, as they were made with after-tax dollars.

Gift the Funds to Others: If you don't anticipate using the funds for educational purposes and don't want to incur penalties for non-qualified withdrawals, you could consider gifting the money to another individual. Keep in mind that gift taxes may apply if the amount exceeds the annual gift tax exclusion limit.

It's essential to carefully consider your options and potential tax implications before making a decision regarding a 529 plan. It may be helpful to consult with a financial advisor or tax professional to explore the best course of action based on your specific circumstances.

This article was authored by Colby Salerno, DO, an FIT at UMass - Chan Baystate.