Average college costs are upwards of $35,000 a year. With many parents dealing with their own student loans, how do you save up for college for your kids?
A 529 is a savings plan that offers tax benefits to encourage saving for future education costs.
There are a few options:
- A 529 College / Education Savings Plan is a savings/investment account with special tax benefits if you use the funds for education. Every state in the U.S. offers at least one.
- A 529 Prepaid Tuition Plan allow you to pay tuition for in-state public schools at today’s prices for future attendance. Essentially you’re pre-paying tuition now, for use later. However, not all colleges and states offer these.
- There’s also a Private College 529 plan with over 200 participating schools.
The main advantage is that those investments grow tax-free and withdrawals aren’t subject to federal tax when withdrawn for qualified education expenses.
Named for the section of the tax code that allows this type of plan, the 529 plan contributions are made with after tax money (as opposed to the pre-tax dollars that fund a 401(k) or HSA) and then invested based on your risk tolerance and objectives.
There may also be some tax benefits at the state level for in-state residents, including state tax deductions based on your contributions
What are qualified education expenses?
- Tuition, fees, books, supplies and equipment
- Certain room and board expenses
- Computers or peripheral equipment, software
- The cost of Internet access if used primarily by the beneficiary while enrolled
- Payment of student loans up to a lifetime maximum of $10,000 for a designated beneficiary or a sibling of the designated beneficiary
- Off campus, rent, utilities and food not purchased directly from the college or university may qualify
- Up to $10,000 per year for tuition at a private, religious or public primary or secondary school
- Fees, books, supplies, and equipment required to participate in a registered and certified apprenticeship program
- Expenses related to students with special needs
Anyone can use a 529 because there are no income restrictions.
The maximum amount you can contribute varies each year, and multiple people can contribute including parents, grandparents and friends.
You can open an account with a financial advisor or directly through the state plans themselves.
You can invest in any state’s 529 plan, not just your own. For example you could be a North Carolina resident, invest in a New York plan and go to college in Florida. You can use your 529 plan at more than 6,000 U.S. colleges and universities as well as some international schools.
When the education expenses are due, you can withdraw that amount from your account and pay your qualified expenses. At tax time, you will note that you made a qualified withdrawal and no taxes will be due on that amount.
What if my child doesn’t attend college?
You have a few options.
- You can change the beneficiary on the account to another family member and still use the funds without incurring taxes or penalties.
- You can always use withdrawals for any purpose and pay ordinary income taxes and a 10% tax penalty (with a few exceptions) on the earnings. That eliminates the tax advantage, but you don’t lose the money in the account just because you don’t use it on qualified expenses.
Want to see if using a college savings plan is right for you and your family? Login to your BrightDime account and chat with a coach today!