We’re going to focus on the savings plan in this article, because over the long haul, you’ll get a better return by investing your money instead of locking in a tuition rate with the prepaid plan. You can reallocate the money within the portfolio you choose, but only twice a year. The 529 savings plan allows you to choose a predetermined investing portfolio that you can use to grow money for your child’s future educational expenses. There are two basic types of 529 plans: savings plans and prepaid plans.Ī prepaid plan locks in the current rate of tuition when your child or grandchild is born, allowing them to avoid the massive price increase due to inflation by the time they head off to college in 18 years. A 529 plan isn’t just a boring financial account-it’s an opportunity to change your family tree, people! You can open a 529 plan for your child or grandchild and name them the beneficiary, which means that they get to use the money to pay for college, among other things. The account options vary depending on your income and your family’s needs, but in this article, we’ll compare the features of the two most common: the Education Savings Account (ESA) and a 529 plan.īut first, let’s make sure you understand the features of each plan!Ī 529 plan (cleverly named after its section of the IRS code) is a state-run tax-advantaged account that allows you to set aside money for educational expenses. The question is, where should you put that money? It can help them graduate from college debt-free, which gives them a firm foundation to start building their life! So, whether Junior is 8 weeks old or 8 years old, open one as soon as you can and start setting money aside. “This is especially true if the alternative is using money that would have to be taxed, such as investments with capital gains or money in retirement accounts,” Fredrickson says.A college savings account is an incredible gift to give your children or grandchildren. “By giving the assets a longer window of opportunity to grow, the more potential tax-free growth you may have in the plan,” says Faron Daugs, a certified financial planner in Libertyville, Ill.įor those who are on track to afford college, however, the option to use 529 savings to pay K through 12 expenses can make sense, says Tom Fredrickson, a certified financial planner in Brooklyn, N.Y. (Check your state’s rules first, because some don’t consider private-school tuition to be a qualifying expense.)īut unless you have additional savings tucked away, be cautious about using 529 money before your child reaches college. You can withdraw up to $10,000 without paying federal income taxes to cover tuition at private or religious elementary and secondary schools. Here’s why.įor those with kids attending nonpublic elementary or secondary schools, federal tax rules allow another option for 529 money. Even a child with less than $500 in any type of college savings account before reaching college age is three times more likely to enroll in college than a child with none and four times more likely to earn a degree, according to a 2017 report by the Institute of Higher Education Policy and the Corporation for Enterprise Development.Įven if your child doesn’t take a traditional college path, saving in a 529 can be a smart move. Just having an account, even if it’s small, can be a powerful motivator to attend college and graduate. A few states-Utah, for one-have 529 plans with no minimum contribution. It’s easy to get started, even if you don’t have a lot to put away. In most states, you can open a 529 with just $25. Just one-third of families saving for college use 529 plans, the survey found. Less than half of families (48 percent) have put aside savings for college, according to a 2020 survey (PDF) by Sallie Mae, which provides student loans. Still, “most families aren’t saving enough for college or saving at all,” Kantrowitz says. Assets in 529 savings plans reached $388 billion in the second quarter of 2022, up from $348 billion in second quarter of 2020, according to ISS Market Intelligence. The tax benefits, along with the rising cost of college, are encouraging more families to save in these accounts. More than 30 states also give you a tax deduction on your contributions. Saving in a 529 remains one of the best ways to put away money for college because you get big tax breaks on the earnings if you spend it on qualified education costs.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |