Our last article covered just how expensive higher education has become, and how investing early and often can help to ensure the expenses associated with your child’s college education are covered.
To help you with your planning and saving, in part 2 of our Diapers to Diplomas series, we will be discussing 529 plans and their benefits in saving for education expenses.
What is a 529 Plan?
Let’s look at a few of the highlights of 529 plans:
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- A 529 plan is a state-sponsored, tax-advantaged savings account that grows tax-free, meaning that there are no taxes (such as capital gains tax) that would be owed on the growth as long as the funds are used for qualified education expenses.
- While there are no federal income tax deductions allowed for contributions, some states allow for state income tax deductions for contributions made for the year.
- The account owner retains control over the account, even after the beneficiary reaches 18. This is in contrast to Uniformed Transfer/Gifts to Minor Accounts (UTMA/UGMA), which transfers ownership when the beneficiary reaches the age of majority.
- Beneficiaries can be changed or transferred easily. If you don’t need to use all of the 529 plan savings for one of your children, you can transfer those to help pay for another child’s or even grandchild’s expenses later.
- Private primary and secondary school expenses of up to $10,000 per year are considered qualified expenses after the passage of the Tax Cuts and Jobs Act in 2017.
- A 529 plan is a state-sponsored, tax-advantaged savings account that grows tax-free, meaning that there are no taxes (such as capital gains tax) that would be owed on the growth as long as the funds are used for qualified education expenses.
529 Investments
Many 529 plans take the guesswork out of investment planning. Many offer target date funds, similar to those found in retirement accounts, that invest more for growth when the beneficiary is younger and gradually move to a more conservative stance as the beneficiary reaches college age.
Some plans may offer risk-based portfolios (i.e. aggressive, moderate, conservative), while others allow the owner to create their own portfolio by picking their own line-up of plan-approved funds.
Our next article will focus on a few commonly asked questions regarding 529 plans. For example: what is considered a qualified expense? What if my child receives a scholarship? And what if all the 529 funds aren’t used?
If you would like to learn more about saving for education expenses, fill out our contact form and a team member will be in touch soon to discuss.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
