529 plans can be a game changer when families want to help their son or daughter with college expenses. These college saving tools have become an increasingly popular way to save for college. 529 college savings plans, while beneficial, are a mystery or entirely unknown to most American households. Keep reading to learn ten powerful facts about 529 plans and what they can do for your family.
What is a 529 Plan?
A 529 plan is a type of investment and savings account where you can save money for a child’s future educational expenses. The 529 name from the section of the tax code the covers these plans.
529 plans come in two varieties:
529 College Savings Plans: As the most common type of 529, this account offers a list of investments you can choose from to grow money over time and benefit from compound interest. Any interest or investment growth is tax-free provided funds are eventually used for qualifying educational expenses.
529 Prepaid Tuition Plans: This type allows your family to buy tuition credits at today’s prices. This locks in the cost with the idea college costs will continue to go up over time.
1. Low Barrier to Get Started
If you invest in many financial products like a mutual fund, the minimum to get started tends to be in the thousands of dollars. 529 Plans require very little to get started. Many states’ 529 plans allow you to start with $25 or less. Minimum amounts for subsequent contributions tend to be just as low or lower.
2. A 529 Plan Can Pay for Many Expenses Outside of Tuition
529 money can certainly be used for tuition, but lots of other education-related expenses qualify as well. As long as an expense meets the IRS definition for a “qualified educational expense” then it’s eligible. That could include fees, books, supplies, room & board, and more. That means your family can use a 529 money to help with a variety of school costs.
3. You Can Change the Beneficiary (Student) Later On
If plans or circumstances change, you have the flexibility to change the student attached to the 529 plan. For example, if you open a 529 for your oldest child and they receive a full scholarship, you could then switch the 529 plan over to a younger sibling. You’re not limited by a particular reason so this could include other situations such as if a child decides to skip college. There’s also flexibility to change over to some extended family members such as nieces or nephews.
4. No Income Restrictions
529 plans have no income requirements. This contrasts with the often-confusing income requirements and restrictions some retirement savers face. Families at all income levels have the potential to save for future college expenses.
5. Tax Free Growth
When you have a 529 College Savings Plan, your family can invest and grow your education dollars. While your college money is growing, your family is exempt from taxes you’d pay in a typical taxable investment account. That includes any interest, dividends, or capital gains that you would otherwise be liable for each year. If the money is ultimately used for eligible college expenses, the same preferential treatment applies when you withdraw the money too.
6. You Could get a Tax Deduction
A contribution to a 529 plan could mean lower taxes. Many states provide a tax benefit when you save money for college. This is generally through a deduction on your state income tax return. Each state is different on the particular benefit and criteria to qualify. If you live in a state that offers a benefit, be sure to investigate how you could reduce taxes while saving for college at the same time.
7. Anyone Can Contribute to your Child’s Education
A 529 can accept money for your son or daughter from anyone. Contributions, including the first one, do not have to come from a parent. If grandparents, aunts, uncles, or anyone outside of family wants to help with a contribution here and there they absolutely can. Some 529 plans even make it easy with a link you can send to a loved one to contribute online.
8. 529 Savings can be Used for Expenses Outside of a 4 Year College Degree
529 plans are most associated with a bachelor’s degree, but the funds can be used for much more. Some other possible uses include private K-12 school, two-year degrees, trade school, vocational school, or graduate degrees. Homeschool does not, currently, qualify. Some conditions apply, but the availability of options has grown over the years to the benefit of many families.
9. The Impact on Financial Aid Eligibility is Tiny
Some families express concern that saving for college with a 529 will remove their student from consideration for scholarships and financial aid. When you student applies for financial aid, they will be asked about assets in a 529. The good news is 529 money is treated differently from other money for purposes of financial aid. If you have a savings account in your student’s name, that money is counted as money that could be used for college according to financial aid methodology. When it comes to money in a 529, only a small fraction is counted for financial aid calculations. Only about one out of every eighteen dollars is counted. Separately, we have countless examples of families that saved for college in a 529 and received financial aid or a scholarship.
"And we know that for those who love God all things work together for good, for those who are called according to his purpose." Romans 8:28 ESV
10. 529 Plans are Opened by State, but Not Limited to That State
529 plans are sponsored by individual states. In most cases, you’ll use the plan for your state of residence. There can be a tax or fee benefit for state residents. If you save in a particular state’s plan, your student is not restricted to schools in your state. You don’t have to worry about where your student might choose to go to school years in advance.
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