Saving for College: Should I Use a 529 Plan?
Hey Taylor - Wondering if you can explain 529 plans to me. One of my New Year’s Resolutions is to put aside college savings for my kid but I’m getting a little confused about the best way to do it. - Scott
Hey Scott - Happy to break down 529 plans. And, for a more detailed answer, you can head to GoFarWithKovar.com and read a full article about the different options for saving up for college. In the meantime, here are my three main points about 529s.
1. Two plan options. 529 plans are offered through individual states and provide two choices for investors. You can either get a prepaid plan, in which you pay a portion of tuition at today’s prices, or you can go with the savings plan and keep accruing wealth between now and when your kid goes to school. Both options will save you money, it just depends on how far ahead you’ve thought this through. Also, it's important to be aware that you are not limited to using a 529 plan from your home state, but each state does have its own guidelines.
2. Tax incentives. One of the best aspects of this type of savings account is the tax benefit. Again, these vary by state, but you can generally avoid state and federal taxes on the money earned by whatever you invest into the account. The tax incentive goes out the window if you try to use 529 funds for anything other than tuition, books, and other education-related expenses. As long as you don’t contribute more than $15,000 in a given year, you should also be able to avoid a gift tax. Just as retirement accounts help people save money on taxes, 529 plans offer a great way for people to save for college so that more Americans can get an education without falling into debt.
3. Education only. Should you save and save and save and then your child decides not to go to college, the tax incentives won’t hold up. However, these accounts are transferable in case another family member plans to go to school or you want to reinvest in your own education. If no one intends to use the account for qualified expenses, the funds will not only be charged normal income taxes but also a 10% tax penalty, just as you’d see with an early withdrawal from an IRA.
There are obvious benefits to a 529 plan, and if you know for certain that your child will go to college, this is a great option. If that future is less clear in your mind, you can look into other accounts that allow you to save with a little more flexibility. Hope this helps!