Today, I’ll be discussing the details of a 529 College Savings Plan…what they are, and how they work.
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 are, there’s a lot to worry about when it comes to giving your kids the best possible future. Let’s break down how you can use a 529 plan to your benefit.
So, 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, depending on how it is invested, with the sole purpose of being put towards education costs. Qualified education expenses include paying for university, university expenses like textbooks and housing, and even a portion of the tuition costs for private K-12 school.
What are the benefits?
First and foremost, a 529 plan withdrawals are tax free at the federal level, as long as it is used for the above mentioned costs. This means the government does not take any money out of a 529 account – including what you have contributed, and what you have earned in the stock market.
While this does not necessarily apply to state income taxes, certain states also offer tax deductions for contributions. Another benefit to 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.
It is also common for high net worth individuals who would like to gift money to reduce future estate taxes upon death, to use 529 plans as an estate planning tool.
So, how does it work?
529 investments work like most other investment accounts. Some people put a monthly contribution 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. Relatives like grandparents can contribute as well. What’s great about a 529 plan is that you, the owner, have complete control – how the money goes in, when the money comes out, and how the money is invested is all under your legal jurisdiction. Moreover, investment plans are flexible. Some people start their 529 with a biannual investment system, and then change it so that they invest once a year or once a month.
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 growth is not taxable along the way. 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.
Most plans allow you to distribute the funds directly to the student, or the university itself. Some plans also allow you to send funds directly to relevant third parties, such as landlords.
If, for whatever reason, the money doesn’t go towards your child’s education, you have the option of changing who receives the money. You may 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.
If you withdraw the money for expenses other than education, taxes and penalties do apply to the earnings, but not to your contributions.
When it comes to affording education and giving your family better opportunities, a 529 account might be the plan for you! You can read more about 529 plans at Saving for College.com,k and as always, you can reach out to me with any questions you may have.
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.
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