Getting the most out of a 529 Savings Plan
A college education, while a worthy achievement, does not come cheaply. Forbes has estimated that the price of a college education has increased 8 times faster than wages, making it a struggle for even upper middle-class families. When factoring in the cost of tuition along with room and board, books, and living expenses, a college education can quickly become an unaffordable luxury. Unfortunately, this increase in tuition has also led to an increase in student loans, as more potential college graduates turn to outside help in order to obtain their degree, with the erroneous assumption that they will be able to easily obtain a job with decent wages that will allow them to pay off their loans painlessly.
That’s why more families are turning to a 529 savings plan. A 529 plan offers families a way to save money for educational expenses with plan participants making contributions using after-tax dollars. Funds in a 529 plan can be used for any educational related expense including tuition, room and board, books, as well as any educational related supplies such as computers and other equipment. Originally designed for college expenses, a change in the tax law passed in 2017 now allow 529 plans to be used to cover tuition and expenses for K-12 education, as well as tuition for both private and religious schools. 529 plan savings can also be used for vocational or trade schools as well and you can also use 529 plan funds to pay for your own schooling as well.
There is no use it or lose it restriction on 529 plans, so even if plan funds are not used for educational purposes, plan holders only pay taxes on any amounts earned through the plan, with no taxes paid on the original investment, whether used for educational purposes or not. For instance, if you have contributed $20,000 to a 529 plan, and the current plan balance is $25,000, if you choose to withdraw the entire amount for a non-education related reason, you will only pay taxes on the $5,000 in earnings. If the entire $25,000 is used for educational purposes, no taxes are assessed.
If you are considering opening a 529 plan, it’s best to start as early as possible, giving the plan the maximum growth opportunity. In fact, many families are not waiting until their child starts school to open a 529 plan, but instead, are opening one upon the birth of their child.
There are two types of 529 plans available; a savings plan and a prepaid tuition plan, with the savings plan working much like an IRA. Also keep in mind that prepaid tuition plans have a lower contribution limit, so your best bet will be to open a savings plan. And like any retirement plan or IRA, you’ll want to remain cognizant about where your money is invested, keeping in mind that you should probably move to more secure investment options as college approaches.
With the cost of tuition placing college out of the reach of many, opening a 529 plan for your children can prove to be beneficial.