What is a 529 plan?
So, you’ve started thinking about saving for college for either yourself, your child or your grandchild – great! But, what’s the next step? With increasing tuition costs, you want to be sure you are saving your money in a way that will maximize contribution growth. A great option for many people is a 529 plan. Let me walk you through how this government-sponsored plan could be a great tool to help you start saving for college today.
What is a 529 plan?
A 529 plan is an education savings account that is exempt from federal taxes and is sponsored by a state or state agency. These plans are designed to help a taxpayer put away money for a designated beneficiary, although any adult can open an account for their own use as well. The funds can be used for undergraduate or graduate school, technician or trade schools, and even cooking schools. You can also use the plan to pay for room and board, fees, books and other supplies.
Different 529 plan options
- College Savings Plan – this option works much like a 401(k) or IRA because it invests your contributions in a mutual fund or similar investment. You often have several options to choose from, and your account will go up or down in value based on the performance of the investment.
- Prepaid Plans – in recent years, these plans have been decreasing in popularity but can still be a good option depending on your situation. A prepaid plan allows a contributor to pay for future college tuition at current rates for in-state college education. These plans can also be adapted for use at private or out-of-state colleges.
Five major benefits of a 529 plan
- Many 529 plans offer income tax breaks because the earnings in these plans grow federally tax-free and qualified withdrawals will not be taxed.
- There may be additional tax breaks from your state so I suggest consulting with your tax advisor.
- The beneficiary has no legal right to the funds so the contributor can be sure the money is being used how it was intended.
- A 529 plan is very low maintenance. After receiving help to set up the account and linking the plan to your bank account or payroll deductions, you need to do very little to continue saving money.
- There are no income or age limits when adding to a 529 plan. Anyone can contribute or establish a college savings plan!
How to enroll in a 529 plan
When you want to begin investing in a 529 plan, I recommend you reach out to a financial advisor directly. There can be several investment options and a financial advisor can help you make the right choice for your unique situation. You want to be sure you are making a sound investment that will have the largest long-term growth in your contributions.
Want to learn more?
Learn more about college savings plans, personal finances or other steps to reach your financial goals by checking out your options below: