November 15, 2017
Start saving for your child's future with a 529 Plan.
So, what exactly is a 529 Plan? It’s a state-sponsored, tax deferred education savings account. There are two types of 529 Plans:
- Savings Plan – Similar to a 401(k) or IRA, you contribute funds to a mutual fund-type investment account.
- Prepaid Plan – You can prepay some or all of the costs for an in-state public college education. There is also a Private College 529 Plan which can be applied to private colleges.
Not every state offers a prepaid plan, and you will want to do some research before you decide on which type of plan is best for you. There are several advantages to a 529 Plan that make it a good college financing source.
- Your withdrawals are tax-free.
When you ultimately withdraw from the plan to help pay for college, you won’t be taxed on the withdrawal or your earnings. This is a great benefit when you consider other savings tools like mutual funds that get hit with a capital gains tax when you withdraw, as well as annual income taxes. Make sure to refer to IRS Publication 970 to confirm this benefit is available when you start a 529 Plan. Check to see if your state offers a tax break as well.
- There's no annual cap on contributions to a savings plan.
You can put in as much as you want into a savings plan each year. This is not true for prepaid plans, unfortunately. If you choose a prepaid plan you will be limited in what you can contribute yearly.
- It doesn’t require much effort once you’re enrolled.
The management of the account will be handled by the investment company managing your plan. If you set up automatic contributions, you may not even notice the money you’re putting toward it, and you’ll be amazed by the growth after several years.
- You have flexibility – because life isn’t always a straight line.
You can change your investment options up to two times a year. You also have the option of rolling your funds into another plan once a year. You can transfer the money from state to state so that you can use the money toward the college of your child’s choosing when the time comes. You can also transfer the plan (whether savings or prepaid) between family members. That means, if your child decides not to attend college or receives enough in scholarships and grants, you can have it applied toward a sibling’s education.
Just know that the funds in your 529 savings plan can only be used toward approved educational expenses. Refer to IRS Publication 970 for a list of approved expenses.
The benefits of a 529 Plan make it a useful resource for parents saving for their kid’s college. Are you ready to enroll? Find out what’s available in your state by visiting the College Savings Plans Network website or contacting your financial adviser.
- College versus retirement: How to set your savings priorities.
- Why you need an estate plan if you’re a parent.