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 eight times faster than wages, making it a struggle for even 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. Although more potential college graduates turn to loans, in order to obtain their degree, the burden of paying back these loans often falls on parents already struggling to save for retirement.
A 529 savings plan can help lesson the dependence on loans. 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, computers and other equipment. Originally designed for college expenses, a change in the tax law passed in 2017 now allows 529 plans to be used to cover tuition and expenses for K-12 private and religious school education. A 529 plan can also be used for vocational or trade schools.
There is no use it or lose it restriction on 529 plans. However, if plan funds are not used for educational purposes, plan holders will pay taxes on the earnings portion of the account. For instance, if owners have contributed $20,000 to a 529 plan, and the current plan balance is $25,000, if the beneficiary chooses to withdraw the entire amount for a non-education related reason, the owner 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. This will give 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. The savings plan works much like an IRA. Prepaid tuition plans can lock in tuition rates, but keep in mind that prepaid tuition plans have a lower contribution limit. Like any investment you’ll want to remain cognizant about where your money is invested and the fees you are paying. Lastly, consider being more aggressive with your investment choices early on and more conservative 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 in the long run. To learn more, contact your local CERTIFIED FINANCIAL PLANNER (TM) professional!
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.