I vividly recall, at 5 years old, riding my bike to the bank with my dad, a backpack full of my hard earned piggy bank change in tow. I sat on the counter and watched in awe as my coins were counted in the wondrous machine and then opened my very first savings account. My dad said that the money I saved would go towards college. Since that moment, I knew that I would do the same for my child one day. However this 529 plan sounds much more complicated than a traditional savings account. What is it exactly? Is it a magical machine that will transform my change into enough money to fund the sky-rocketing tuition costs?
Unfortunately, no such phenomenon has yet been discovered. However, the 529 sure does sound like a great option! A 529, also known as a qualified tuition plan, is a state-sponsored investment program developed in 1997 in order to help families save for college. Offering flexibility, control, options, minimal restrictions, and tax advantages, a 529 plan is a great way to save money to apply towards tuition, room and board, mandatory fees, books, and computers. The myriad of advantages of a 529 plan include:
Unlike other investment options, 529 earnings do not incur income or capital gains tax.
- Federal: 529 plans grow tax free, thus you pay no federal tax on earnings
- State: State tax benefits vary by state. Many states offer a tax deduction, so check this out when choosing your plan.
- Gift Tax: Under the 529 plan, you can contribute up to 65K in a 4-year period, which is five times the normal 13K per year per student, without incurring gift taxes.
Withdrawals are tax free as long as they are used for qualified higher education expenses (tuition, room and board, mandatory fees, books, and computers).
High Contribution Limits
Limits are as high as 320K in some states.
Low Initial Investment
You can often start a 529 Savings Plan for as little as $25.
Financial Aid Eligibility
No more than 5.64% of savings from a 529 plan can be counted as income towards financial aid eligibility. This is far lower than what they include for traditional savings accounts or other types of investments.
A 529 Plan does not tie your child to certain schools or locations, unlike traditional educational savings plans.
There are many plans to choose from and many investment options within those plans. Popular options include age-based plans and pre-paid plans.
You can have more than one 529 plan per child. This enables relatives to set up additional savings plans for your child!
You can invest in any state’s plan, no matter where you live.
If your child gets a scholarship or doesn’t go to college, you can transfer savings to a different beneficiary or use them for yourself.
Even though there is no magical tool, and 529 plans do carry risk like any other investment, the flexibility, options, and tax benefits make this a very worthwhile college financing option. This option will still allow me to teach my child to put his/her earnings towards college, and it also provides alternatives if in fact he/she does earn a full ride.
Have you chosen a 529 for your child? Share your choice with our readers. Did you know FreshmanFund.com can help you save more for college? Every bit helps!