Are you a parent of young children? If so, you may not be thinking about planning for college when you might be dealing with diapers, baseball practice and packing school lunches each day. But, it’s important not to wait too long before putting money aside for your child’s future education. With the cost of college rising each year, it’s hard to imagine what the tuition sticker price will be when your young children are finally old enough for college. So, now is the time to start looking into the option of a 529 savings plan.
529 plans are a type of investment plan which offer incentives to encourage parents to set aside money by offering tax benefits, such as tax-free earnings and withdrawals for qualified educational expenses.
Depending on where you live, choosing your state’s 529 plan may offer additional tax benefits, but you can also expand your search to look at other state’s offerings. You should shop around for a plan offering the best investment options and lowest fees so you can maximize your money.
You can think of a 529 account like a Roth IRA account, but a 529 is for education purposes instead of retirement. You can save money by not paying taxes on your earnings and when you withdraw it for qualified education expenses like tuition and textbooks.
In addition, parents and guardians have the potential of earning more compared to sticking their money in a savings account. While growth isn’t guaranteed, many 529 plans typically have a higher than average rate of return than what you’d find with deposit accounts.
Another type of 529 plan is the prepaid tuition plan. The difference between this and the 529 college savings plan is that it allows account holders to purchase credits or “units” at participating educational institutions that can be applied in the future toward tuition and fees for their child. While you can prepay for tuition, these plans don’t typically cover future room-and-board costs, which is an expense covered by a 529 plan.
The main benefit of a prepaid tuition plan is that you have the potential to save on tuition, since you’re paying today’s price for future tuition. However, if your child doesn’t attend a specific school (typically public and in-state participating colleges), you may lose part or all of your money. Even if you’re able to transfer some or all of your funds to another participating institution, the value may go down.
When it comes to selecting a 529 plan, you should look into whether your state offers any tax advantages. Before opting for your state plan, check to see if there’s any special tax incentives and whether the advantages outweigh any drawbacks, like high fees or poor fund performance.
If your child doesn’t end up going to college or you don’t end up needing all your 529 savings to cover their education expenses, you have a few options. First, you can transfer whatever is left in the 529 plan to another child, eligible dependent or use it yourself for qualified educational needs. To do so, simply change the beneficiary on the account — your 529 plan provider will have instructions on how to. Otherwise, you can withdraw the cash, though you’ll pay a 10% penalty, plus any income taxes you may incur. You can also roll it over to a family member’s ABLE account without incurring any penalties. These tax-advantaged accounts are for people who were disabled and received Social Security insurance benefits before turning 26.
A 529 plan is a great idea for parents who place importance on a college education and want to save money when making financial contributions. The benefits seem like a no brainer! So, even if you think your children are many years away from college, it’s never too late to start thinking about how you are going to pay for it. If you have any questions about setting up a 529 plan, please reach out to us at firstname.lastname@example.org or schedule a 30-minute complimentary intro-call here -we are here to help!