SAVING UP FOR COLLEGE: What You Need to Know about a 529 Plan
It’s no secret that college is expensive. With student loan debt exceeding $1.5 trillion and the university price tag rising 8 times as fast as wages, there’s a lot to worry about in giving your kids (or yourself!) the best possible future. Let’s break down how you can use a 529 plan to your benefit.
What is a 529?
A 529 plan is a savings plan specifically for education. The money you invest in a 529 account accrues interest over time, with the sole purpose of being put towards your education. This education includes paying for university, university expenses like textbooks and housing, and even a portion of the tuition costs for K-12 school.
What are the benefits?
First and foremost, a 529 plan is tax free at the federal level. This means the government does not take any money out of a 529 account – neither the interest on the account nor withdrawing money for educational expenses is taxed as income.
While this does not necessarily apply to state income taxes, certain states also carry tax deferment plans. Find out which states offer reduced or no-tax accounts here. The cool thing about 529 plans is that they aren’t restricted to your state – you can be a resident of Idaho, have a 529 plan in Texas, and use the money for a school in Wisconsin! You just need to research the rules and details for each individual state.
How does it work?
529 investments work like any other investment account. Some people put a monthly stipend into the account, others gift the money on important days like birthdays and holidays, and some will invest a lump sum and wait 18 years for the account to mature. What’s great about a 529 plan is that you, the donor, have complete control – how the money goes in, when the money comes out, and how the money is invested is under your legal jurisdiction. Moreover, investment plans are flexible. Some people start their 529 with a biannual investment system, then change it so that they invest once a year or once a month.
Are there different types?
Yes! There are two types of 529 plans. The College Savings Plan works like a Roth 401(k) or Roth IRA account, allowing you to invest after-tax contributions to mutual funds whose value fluctuates with the investment’s performance. The other plan, a Prepaid Tuition Plan, let’s you pre-pay the costs of an in-state college or university. Details for both of these plans are vary by state and are covered more extensively in state-specific programs.
Additionally, some states and universities offer a Private College 529 Plan, allowing you to start a prepaid account for specific private universities. Again, this plan is sponsored by specific states and universities.
How do I use my 529 plan?
Most 529 plans will provide an overview of how to use the funds once you or your child enter university. Most plans allow you to distribute the funds directly to the beneficiary or the university itself. Some plans also allow you to send funds directly to relevant third parties, such as landlords. You can read more about to pay for your tuition here.
If, for whatever reason, the money doesn’t go towards your child’s education, don’t worry! You have the option of changing who receives the money, and could even change the recipient to yourself to fund your own higher education. Moreover, the funds can be held for another student, held off for graduate school, or even transferred to a 529 ABLE account for people living with disabilities.
For affording education and giving your family better opportunities, a 529 account might be the plan for you! You can read more about 529 plans and the finer details at Saving for College.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.