What is a 529 Plan, and Why Should I Open One?
You don’t need a Ph.D. to know the costs of education have risen dramatically in recent decades. Many parents worry about how they will pay for their kids’ schooling from they day they are born.
The 529 investment plan was designed specifically to help parents plan for school costs and reward saving with benefits that help contributions grow more than in traditional investment accounts. But 529 plans come with their own special rules that may take expert help to unravel.
Start exploring 529’s early – but don’t open one until it makes sense
Paying for school is a big deal, but only one of many big deals. Is your debt paid down? Do you have emergency savings? Are you on track for retirement? Restrictions mean a 529 isn’t a place to stash money you may need. On the other hand, the longer it grows, the greater the benefit. Talk to an expert and plan how you’ll balance all your needs.
Understand the rules and restrictions clearly
529 plans offer tax-deferred growth and tax-free distributions – with a caveat. Those benefits only apply when money taken out is used for qualified educational expenses. In the meanwhile, you may enjoy state tax advantages (the rules vary by state), and growth won’t be taxed. On the other hand, withdrawing for a non-educational need may result not only in taxes, but penalties.
Plan for flexibility in finances and education
So what if your child doesn’t go to college, or money is left over? Fortunately, there’s flexibility. First, it’s not just for college – starting in 2018, up to $10,000 from a 529 plan can be used for qualified elementary, middle or high school tuition per year, per child. Second, the beneficiary can be changed, so funds can go to another child, or towards a parent’s grad degree.
Let others give the gift of education
Get grandparents, relatives and friends in on the action. If you open a 529, one of the unique features of the plan is that others can easily contribute. Family or friends can give gifts directly to your student’s 529 and their contributions will enjoy all the benefits of the plan.
As a part of the federal tax code, you also need to pay attention to rule changes from year to year. And remember, a 529 is just one way to pass on wealth and fund education. It seems complex, but with guidance, a 529 can offer big help for families facing a big school bill.