The days when you could stash loose change in your child’s piggy bank and then put it into a savings account to save for college are, unfortunately, long gone. With college tuition costs rising, and interest rates on savings accounts falling, parents now need better options for saving for their children’s education. If you want to get the most value for your money, consider opening a 529 plan.
A Quick Overview
A 529 plan is similar to an individual retirement account, except it is held by the parents as a means of paying for their child’s, or children’s’, college expenses. There are no restrictions on which state your child can go to school in based on the state you buy the plan from. Formal 529 plans have several benefits worth noting.
Federal Taxes
529 plan contributions are not tax-deductible; however, the investment earns tax-deferred interest over the years. When the money is used to pay for the beneficiary’s educational costs, the withdrawals are not taxed.
State Taxes
Many states offer additional tax breaks to residents who set up a 529 plan in their home state. If your state doesn’t offer any tax benefits, you may be able to open a plan in another state. It’s worthwhile to compare different plans.
You Have Control
Parents who set up the account have sole control over how the funds are used. The beneficiary cannot access the money directly. Donors can even take back some of the money; however, if it is for a non-qualified withdrawal, the money is subject to income tax plus a 10% penalty.
Setup and Watch it Grow
There is very little work in maintain a 529 plan. Either the state or the program manager handles all the investments. Parents simply have to enroll in a plan and choose how they want to make their contributions.
No Reporting
Unlike with a savings account that you have to report yearly earnings on, 529 plans only require parents to file a 1099 on years they make withdrawals. This form covers both taxable and nontaxable earnings.
Flexibility
You can change your plan once per year if you wish. Parents can also decide to move their plan to a different state as long as it is only once every 12 months. Additionally, they can decide to change the account’s beneficiary at any time.
Few Limits
With many plans, you can deposit up to $300,000 per beneficiary, which is a pretty high limit. Parents who are considering furthering their education can also set up plans for themselves as well because there are no age restrictions.
There are many ways to save for your child’s college tuition and expenses, but 529 plans are often the best option. They have better tax benefits and higher yields than savings accounts. The earlier you start saving with a 529 plan, the easier it will be come up with enough money to send your child to college. If you have questions about setting up a plan for your child, your best bet is to speak to a reputable financial advisor.
About the Author: Samuel Sawyer is saving for college for 3 children. He also pays for Dallas tutoring and tons of educational activities to ensure his children get the best learning experience possible.
