Education
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Posted on November 18th, 2024
Saving for a child’s education can feel overwhelming, but a 529 college savings plan can make it easier and more effective. These tax-advantaged savings plans, named after Section 529 of the Internal Revenue Code, are designed to help families save for future educational expenses while offering significant financial advantages.
Let’s break down why a 529 plan might be the perfect solution for your family’s college savings goals.
529 plans allow you to invest your contributions, so you’re not just setting money aside for college—you’re earning compounding returns. Those returns are reinvested each year, helping your savings grow exponentially over time.
Contributing small amounts consistently and starting as early as possible ensures you have plenty of time to benefit from compounding growth. The longer your money is invested, the more years your returns can compound.
The tax benefits of a 529 plan are unmatched when it comes to college savings. Contributions grow tax-free, and withdrawals are also tax-free when used for qualified educational expenses.
Thirty-four states offer residents state-tax deductions or credits for 529 contributions. These benefits vary by state, so compare your state’s plan performance and fees to ensure you’re getting the best value.
Contrary to popular belief, 529 plans aren’t just for traditional colleges. They can cover tuition for trade schools, community colleges, graduate programs, private K-12 education, and even some international schools.
Qualified expenses go beyond tuition. They include textbooks, supplies, computers, meal plans, and housing costs required for enrollment.
Another SECURE Act feature allows 529 funds to pay up to $10,000 of student loan debt for the beneficiary and each of their siblings. If one child receives a scholarship or chooses not to attend college, leftover funds can be used to help pay off another child’s student loans. You could even make yourself the beneficiary and use it to pay off your own student loans!
If your child earns a scholarship, you can withdraw the equivalent amount without penalty, though taxes apply to the gains. Alternatively, you can transfer the account to another eligible family member without penalty or tax consequences.
If college isn’t in the cards for your child, your savings aren’t lost. While withdrawals for non-qualified expenses incur taxes on gains plus a 10% penalty, remember that traditional investments are also taxed.
A newer benefit allows up to $35,000 of unused 529 funds to be rolled into a Roth IRA for the same beneficiary, provided the account has been open for at least 15 years. This lets you keep the tax-free growth going.
Many financial accounts require a significant initial deposit to get started. Some 529 plans (like the ones offered by Raise Education) have no minimum balance, making it easy to open an account and start saving right away.
A 529 plan has the least impact on your child's financial aid eligibility out of all college savings methods. If the parent is the account owner, and you save $10,000 in a 529 plan, your need-based eligibility would only be reduced by a maximum of $564 instead of the $2,000 impact that same $10,000 would have if it were in a savings account.
As the account owner, you retain full control over the funds and can change the beneficiary to another family member if needed, ensuring your savings are always put to good use, and not wasted on an epic spring break.
In less time than it took to read this blog, you could have a 529 plan up and running.