The 411 on 529 Plans: When and how to start savings for your kid’s college

If you have a newborn or a toddler, you’re probably more concerned with getting a solid 3 hours of uninterrupted sleep than saving for your child’s college education. After all, college is 18 years away, so you’ve got time.

If you’ve ever heard the saying, “the days are long, but the years are short,” take heed. It’s the truth. Blink and your child is throwing their graduation cap in the air and packing the car with dorm room essentials.

Now that we’ve established the fact that you don’t have as much time as you think, what can you do about it? With the skyrocketing cost of tuition, some parents are wondering if they’ll ever be able to afford their child’s college education.


What is a 529 College Savings Plan?

The key to building a solid financial foundation to help support your child’s academic future is to start early and save regularly. A 529 plan is one of the most popular, hassle-free, college savings vehicles available in the market today.

A 529 plan is a state-sponsored, tax-advantaged, education savings plan that is designed with features and benefits that encourage early investing for your child’s future education. It’s offered to help families establish a stronger financial strategy that will ultimately help their children—or another named beneficiary—continue their education. Any citizen or taxpayer can open an account, and almost anyone can help by contributing funds, including grandparents, other family members, and friends. It’s the perfect place for monetary gifts for birthdays, graduations, and holidays to grow with purpose.


Tax benefits

While contributing to a higher education savings plan can help make education more affordable, it also provides valuable tax benefits. The majority of states offer at least one 529 plan and the majority of states also offer full or partial state income tax deductions or other credits for contributions. Plan features and investment options can differ by plan and by state, and residents are not required to invest in their home state’s plan, nor attend an in-state school.

The IRS doesn’t specify a maximum dollar amount for annual contributions to a 529 college savings plan. However, contributions to the plan are considered gifts for tax purposes and can be included in the 2018 annual exclusion of up to $15,000 per beneficiary. Any earnings accumulated in a 529 plan are exempt from federal income and capital gain taxes.

529 plan balances cannot exceed the total cost of the beneficiary’s higher education. Plan balance limits, which vary by state and range from $235,000 to $520,000, represent each state’s best and highest estimate of the cost of attending college and graduate school.


Qualified and non-qualified withdrawals

Tax-free withdrawals from the plan can be used to satisfy tuition for most accredited universities, colleges, technical and vocational schools in the U.S. as well as many abroad. The benefit also allows up to $10,000 per year and per beneficiary for private, public, or religious elementary and secondary schools. Additionally, account funds can be used to pay for some room and board costs, supplies, books, computers, printers, and internet access. Other fees and necessary equipment may also qualify under the plan.

Any withdrawals used for non-qualified expenses, like transportation, student loan costs, or sports and activities, will result in a taxable event. These non-qualified withdrawals will be subject to federal and state taxes and an additional 10% penalty tax, but only on the earnings in the account. If, however, your student beneficiary receives a scholarship, dies, or enrolls in a U.S. service academy, the 10% penalty is waived. Unless you’re able to change the beneficiary to another student, you will, however, be taxed on the earnings in the account.


Take your first step

Saving for college is an important step in your overall financial plan. Start early with a 529 Plan and you can earn years of compounding, tax-free growth, and annual tax credits. If your children are headed for college—or you’re looking to go back to school—talk with your local investment advisor.

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