In 2017, before my son was born, I started to think (more like worry) about saving for college. I knew college was going to be expensive and I wanted to get a head start saving. Depending on circumstances, the average yearly tuition for college can range from $25,000 to $51,000 — www.valuepenguin.com. I wanted to maximize every dollar I saved, but I wasn’t sure how. After doing some research, I began to learn about 529 college savings plans. There was a lot of information online about 529 college savings plans, but the information was scattered and superficial. Before I invested any money, I wanted a deeper understanding of what I was investing in. I wanted to feel confident I was making the right choice. I kept searching and found some useful information.
529 Benefits
A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. There are numerous benefits if you invest in a 529 college savings plan.
- Tax Advantages: Contributions to a 529 plan grow tax-free, meaning you don’t pay taxes on the earnings as long as the funds are used for qualified education expenses. Qualified education expenses include tuition, fees, books, supplies, and even room and board for eligible institutions.
- Flexibility: 529 plans provide flexibility in how the funds can be used. The flexibility ensures that the funds can be used for various educational needs, ranging from traditional colleges, vocational schools and qualified K-12 tuition expenses. Additionally, if you have unused funds in the plan, the owner can change the beneficiary – for example, you can change the beneficiary from an older sibling to a younger one when you want.
- High Contribution Limits: 529 plans often have high contribution limits, allowing you to save substantial amounts over time. For instance, California has a high contribution limit of $529,000 per beneficiary.
- Tax Benefits: 529 plans may offer additional state or federal tax benefits. For example, Virginia529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carry-forward to future tax years, subject to certain restrictions.
- No Income Restrictions: Unlike some other education savings options, 529 plans do not have income restrictions. This means that families of all income levels can contribute and benefit from the tax advantages and growth potential of these plans.
- Interchangeability Between States: You are not limited to the 529 plan offered by your state of residence. In many cases, you can choose a plan from any state, giving you the flexibility to select the plan that best suits your needs and offers the most favorable investment options.
These are just some of the benefits.
My Favorite 529 Resource
Before investing any money, I came across a site that provided extensive and easy to understand information about 529 plans — Savingforcollege.com — providing unbiased information. It is easy to navigate through the website and you can review different 529 plans. You can easily compare your state’s 529 plan to other states’ plans. Additionally, Savingsforcollege.com provides a great college savings calculator that can assist with providing projections of future costs and estimated savings you need to help reach your target.
Savingforcollege.com gives a great overview of 529 plans and provides metrics such as performance, costs, features, and reliability. For example, as mentioned above, I found out that every state offers a savings plan and you’re not limited to contribute to the plan in the state you reside in – in fact you can invest in 529 plans of different states at the same time. Really great information.
SECURE 2.0 Act
Recent legislation known as the SECURE Act 2.0 allows a beneficiary to use distributions from a 529 college savings plan for retirement savings. The legislation that goes into effect in 2024, allows distributions from 529 plans to be converted tax and penalty free (up to $35,000) to a Roth IRA owned by a 529 beneficiary. However, you should familiarize yourself with the eligibility and criteria – for example, rollovers are subject to Roth IRA contribution limits and the 529 account must have been open for 15 years. This is a great advantage because it gives individuals another option to avoid paying income tax and a 10% penalty on the unused funds.
Let’s say you have a 529 plan established for your child, and the current balance in the 529 plan is $50,000. Under the new provision, you can choose to convert $35,000 from the 529 plan to a Roth IRA owned by your child, without incurring any taxes or penalties. By making this conversion, you’ve effectively moved $35,000 from the 529 plan to a Roth IRA, which has its own set of advantages.
Conclusion
Investing in a 529 college savings plan provides tax advantages, state tax incentives, spending flexibility, and control and ownership benefits. These advantages make it an attractive option if you are looking to save for future educational expenses and achieve educational goals. Take a look around and see what plan works for you.