It’s no secret that education can be expensive, adding extra stress to your current budget and future financial plans. Fortunately, the 529 Plan can help.
The 529 College Savings Plan is designed to be used for a wide range of qualified education purposes. The fund can go toward tuition, room and board, books and other expenses at a four-year college, k-12 education, apprenticeship programs — even student loan payments.
With the 529 plan, you can save early and save often for your child’s future — or start putting away money for your own education plans.
Here’s a quick rundown on 529 plans.
What it is:
A 529 is a state-sponsored college savings plan that allows you to invest money, grow funds tax-free and withdraw them without tax penalties — as long as the money is spent on what they call “qualified higher education expenses” for the beneficiary.
The 529 plan allows you to cover education expenses in two ways:
1. By setting up an education-only investment account that saves — and accrues — money over time.
A 529 Fund generally invests in a portfolio of bonds, mutual funds, stocks and other investments that grow over time. While each state offers its own version of the 529 plan, investment accounts are available to anyone regardless of location. You can shop from state-to-state, choosing from more than 100 different plans, with varying time frames, investment options, fees and tax benefits, depending on your particular needs. However, investing in your own state’s plan could come with additional perks like matching contributions or state income tax deductions — so it’s worth starting your research on your home turf.
2. By pre-paying college tuition through the prepaid 529 plans.
Prepaid plans allow you to lock in present day tuition rates at participating institutions and use them in the future. These plans are generally only available to residents, and designed to be spent at public institutions in that state. (The Private College 529 plans is available for private schools.) Plans can be transferred toward another postsecondary institution if your child chooses a different path, but these plans are more limited in what they cover, making them a slightly less popular option.
How it works:
You or your child can only apply the money from a 529 toward what they call “qualified education expenses.” Qualified education expenses include tuition, books, room and board, books, internet access, computers and equipment for any special needs. When it’s time to withdraw, you can access the money easily and without tax penalties.
While most plans have a minimum deposit requirement up front, after that’s met you can deposit as much as you want, when you want, for the duration of the account, whether you’re adding a set amount monthly or depositing lump sums whenever your budget allows. Family, friends and other loved ones can also easily deposit into the account, making it a simple place to collect any type of monetary gifts.
Why to do it:
Because education is expensive — and the costs keep rising. Over the last 20 years, average tuition costs have grown between 144 percent to 211 percent, depending on the location and type of institution, and if costs keep climbing, a four-year university could cost more than $100,000 a year by 2030. Getting a jump on saving for school can help alleviate the financial stress of schooling.
The downsides:
While the 529 plan comes with plenty of upsides, there are a few drawbacks to keep in mind. For example, there are penalties for non-educational withdrawals as well as withdrawals that aren’t applied in the same year. You’re also putting your faith in someone else’s financial decisions, as the state’s plan manager has decided on pre-set investment options. (A definite drawback for those who are interested in the market.)
Finally, having too much in your child’s 529 plan could impact how much financial aid they’re eligible to receive. Fortunately, there’s a workaround here: since it’s easy to switch beneficiaries, you can put the plan in your own name and transfer to your child when it’s time to use it.
To learn more, talk to a financial advisor or visit Savingforcollege.com to view plans and enroll.
