If you have a child and you think that college might be in the cards for them, then a 529 plan is potentially for you.
If you’re wondering what in the world a 529 plan is…then this post is also for you!
A Section 529 plan is a college savings account that is administered by individual states that you can then use as a tax-advantaged way to help fund your children’s education.
There are two main types:
- A prepaid tuition plan
- A college savings plan
The prepaid tuition option allows you to do exactly what the name suggests and pre-pay the tuition/fees for your child (or other beneficiary, such as a grandchild) for certain institutions in advance. However, seeing as how you may not already know exactly where your little one might be spending their college years, there’s also the option to contribute to a college savings plan.
A college savings plan is not unlike other investment accounts (such as a Roth IRA) in that you’re able to invest after-tax dollars and allow the earnings to appreciate tax-free, provided the money stays in the account. You are capped at the amount you can contribute, but these plans do allow you to save a significant amount of money (to the tune of $400,000 in some states). Also, as long as you use the money in the account to pay for qualifying educational expenses (i.e. tuition, books, applicable fees, supplies, etc.), you don’t have to pay taxes on the withdrawals. Oh, and as of the recent changes to the IRS tax code, you can also withdraw up to $10,000/year tax-free from this account to use to fund tuition expenses at private, public, and religious K-12 schools for your child (or other beneficiary)!
So, need a few other reasons why this option is most popular?
Many states offer some sort of tax deduction or credit for 529 contributions. We’re all for reducing our tax liabilities! 🙂
Additionally, grandparents (or another “third-party”) can also open 529 plans for their grandchildren and may contribute up to $14,000/year per child (without triggering the gift tax). In the case of a grandparent looking to significantly contribute, they can contribute up to 5 years of contributions in advance by making a one-time donation of $70,000 (which represents their $14,000/year contribution paid in advance for 5 years). Contributing this money up front can greatly increase the effect of compound interest on the account’s earnings.
So, while there are other ways you can certainly go about saving for and financially preparing for college and other educational needs, a 529 plan is a great place to start.
For more information on these plans and to check and see what your state has to offer, consider visiting: www.savingforcollege.com.
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