What is a 529 College Savings Plan, and Why Do I Want One?

One of the first conversations my wife and I had after the birth of our son was our desire to start a college savings account for him. I suspect many parents have that same thought early in the life of their children given the ever increasing cost of a college education. But saving for your child’s future education shouldn’t just be depositing money into a savings account. There is a special kind of account that provides tax benefits that should be used instead. Parents putting away cash for a child’s college education should open a 529 plan.

Here are the highlights of what you need to know about how a 529 plan works:

Tax Incentives

Contributions are not tax deductible, however 529 plan earnings do not incur any yearly federal income tax, nor are withdrawals taxed if used for higher education costs. Tax incentives vary by state regarding yearly income tax or taxes owed when withdrawn. Check on your individual state’s tax laws regarding 529 plans for more information.

Plan Beneficiary

When a 529 plan is opened, a single beneficiary is designated. The beneficiary is the person who will receive the withdrawn funds to pay for their higher education. The beneficiary of a 529 plan can be changed without tax penalty. Also, the funds from one 529 plan can be rolled into another 529 plan. For example, a person with multiple children may roll funds from one child’s 529 plan into another child’s plan if needed.

Plan Control

Except for a few rare scenarios, the names beneficiary has no legal right to the funds. Therefore, the contributor has full control over the account to ensure the funds are used properly, and as intended.

Contribution Limits

529 plan contributions are counted as a gift, Therefore, tax consequences may apply if 529 plan contributions plus other gifts exceed the gift tax exemption threshold of $14,000 for individuals, or $28,000 for married couples filing jointly, in a single year.

Invested Funds

Much like a 401K plan, the contributor is given options by the plan provider for investment of the 529 plan funds. The investment options can be changed twice per calendar year, allowing for flexibility in allocating the funds to investments that maximize growth.

Better Late Than Never

Even if your child is already starting college, it may still be worth starting a 529 plan. Student loans are generally low interest, and do not require repayment until after graduation. In times of high economic growth and market gains, the funds in a 529 plan may grow faster than the accumulating interest on some student loans.

Parents want to see their children starting out their adult lives with every advantage possible. Saving for their college education using a 529 plan can help maximize a parent’s ability to help their child graduate with as little debt as possible.

How about you, EOD Nation, do you have a 529 plan for your child?

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