For families, education expenses can be a significant challenge both emotionally and financially. However, there are tools available that can make this task much less daunting. One such tool is the 529 plan, a state-sponsored savings account that offers tax benefits specifically for education funding. The advantages of this innovative investment tool can make a real difference in a child's future college bills.
By taking advantage of the tax benefits and carefully planning your contributions, you can significantly reduce stress and alleviate the eventual burden of college expenses. With a 529 plan, you can provide your child with a brighter and more financially secure future.
Named after Section 529 of the Internal Revenue Code, the 529 plan was created to help families set aside funds for future educational expenses on a tax-efficient basis. By doing so, 529 accounts help families maximize the time before college by allowing contributions to grow to an amount that can cover expensive education bills.
Each state has set up its own unique 529 plan. Although small provisions change state by state, there is a wide range of universal benefits the 529 plan provides, such as:
- Tax benefits: Contributions to a 529 plan are made with after-tax dollars. As the contributions benefit from compound interest and grow, all the earnings are tax-free if the money is used for qualified educational expenses. Some state’s 529 plans even provide tax deductions or credits towards the account owner’s state income tax bill.
- Spending flexibility: Qualified educational expenses are more than just tuition alone. 529 plans can be used for room and board, computers, software, books, and even student loans (with a lifetime limit of $10,000).
- Control and ownership: You don’t need to be the parent or guardian of the child to set up a 529 account. You also maintain control of the funds even if the child decides against college. As the account owner, you also have the liberty of selecting the investments in the plan; a significant value-add.
- Professional management: Many states allow their 529 plans to be managed by professional investment managers, which helps families offload some of the work that they find overwhelming.
- Planning for the whole family: If there are still funds in the 529 plan when the child finishes college, they can be transferred to another family member for their educational use. This includes nieces, cousins, grandkids, etc. It is a gift that keeps on giving.
Below are several questions we hear about 529 plans:
1. What happens if the child does not go to college?
Thanks to the recently instituted SECURE (Setting Every Community Up for Retirement Enhancement) ACT 2.0, a portion of the unused funds in your child’s 529 plan can be used to fund a Roth IRA up to $35,000. To qualify for this, the 529 plan must be open for 15 years, thus prioritizing the opening of a 529 plan makes sense to start the clock, even if you only contribute $50.
2. What if the beneficiary receives a scholarship?
529 withdrawals for non-qualified expenses typically call for income tax and a 10% penalty to be paid on the earnings. However, scholarships provide a special exception to the 10% penalty. You as the owner can withdraw up to the amount of the tax-free scholarship and will only need to pay income tax on the earnings. The penalty is avoided!
3. Will it affect financial aid eligibility?
Federal Student Aid applications look at assets in the child’s and their parent’s name, which applies to 529 plans owned by the parent. However, 529 plans owned by grandparents bypass federal aid qualifications. So, if Grandma or Grandpa want to help pay for education, the opening and use of a 529 plan will not negatively impact federal aid.
4. Where can I find information about my state’s 529 plan?
When it comes to researching different 529 plans, the best place to start is https://www.savingforcollege.com/529-plan-details. This website provides comprehensive information on various plans, allowing you to compare and choose the one that makes the most sense for your financial situation. It's worth noting that your child's college of choice doesn't have to be in the same state as the 529 plan you choose. This means you have greater flexibility when choosing the right plan for your family.
Overall, 529 plans are an excellent investment tool for families who want to save for their children's future education expenses. With tax benefits, a range of investment options, and flexibility, these plans can help you reach your financial goals. Whether you're a parent, grandparent, or family friend, a 529 plan can make a significant impact on your loved one's future. If you're looking for a smart and effective way to pay for college, a 529 plan is worth your careful consideration.
EASTON DICKSON, CRPC®
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