OUR CHILDREN FACE MANY NEW CHALLENGES IN THE WORLD…WOULDN’T YOU WANT TO HELP THEM BE AS PREPARED AS YOU CAN FOR THIS FUTURE WORLD?
Why should you consider a 529 plan? Student loan debt statistics in 2021 are staggering figures. According to a Forbes.com article “there are 45 million borrowers who collectively owe nearly $1.7 trillion in student loan debt in the U.S. Student loan debt is now the second-highest consumer debt category — second only to mortgage debt and higher than debt for both credit cards and auto loans”. If that does not inspire you to start planning for your child’s future, I don’t know what will. I graduated from college two decades ago with student loan debt, so I know firsthand just what kind of start that gives you in life. Starting off your adult life in debt is not a great start! In my early years as a CPA, I learned about 529 plans.
WHAT ARE 529 PLANS AND WHY YOU NEED THEM?
529 Plans are tax-advantaged savings plans eligible to be used in various ways. Secondary education is insanely expensive. Some may argue that this will ruin their children from getting financial aid, or maybe their child will not go to college, or what if their child gets a scholarship? Those are all good points. But first I want to tell you what is great about 529 plans. Saving for college is something that is never a bad idea. I can personally say that I paid for all my college while simultaneously working and it was really hard. I would not recommend that to anyone. Planning for the future is something that every person should do, and 529 plans should be part of that if you have children. 529 plans allow you to save for education and have that money grow tax-free if certain rules are followed.
In general, states sponsor 529 plans, also known as qualified tuition plans. It is a means of financial planning via a tax-advantaged investment vehicle. Account owners keep the accounts until they are used for beneficiaries. These plans are flexible because you can use them for several different types of education expenses. A beneficiary can be anyone, they do not have to be a child. When you withdraw from a 529 plan, you must use those funds for qualified expenses defined under the plan. But if you do, the great part is that your investment grows TAX-FREE! It is like a 401k plan in that way. If you start with your children (or another beneficiary) is young, you can make the most of this growth.
HOW TO USE 529 PLANS
529 plans may be used for several different types of education expenses. Here are the main categories of qualified expenses:
- COLLEGE TUITION – at eligible colleges or universities
- TRADE SCHOOL – if your child is not interested in college, certain trade schools are also an option (that are eligible for Title IV federal student aid)
- K-12 TUITION – up to $10,000 can be used tax-free for k-12 tuition.
- SUPPLIES – such as textbooks and computers
- ROOM & BOARD – on campus and even off-campus (with restrictions)
The details are all in the plans, and you should read and understand fully what qualified expenses are when you enroll in a 529 plan.
CONSIDERATIONS FOR 529 PLANS
There are so many reasons why 529 plans are a good idea. Practicing financial literacy by planning for the future with college savings is an amazing way to help your child get a start in the world by avoiding student loan debt. Investing in your child’s (or other loved one’s) future is a wonderful way to give them a better start in the world. But there are considerations. Some people worry that having a 529 plan will ruin their chances of getting financial aid. Consideration is given when filling out the FAFSA and 529’s are considered parent assets (not student), which is favorable. It comes down to this…as a CPA I am conservative by nature. And the way I see it is this…you are not guaranteed financial aid, but if you save for your child’s future, that is a sure thing.
What about scholarships? If your child gets a scholarship, that is amazing! What a great position to be in. And the plan accounts for the fact that this could happen with a special exemption. In this case, you can withdraw dollars up to the amount of the scholarship with no penalty, but you do have to pay the tax (but only on the earnings, not the entire investment). With proper planning, you can use those funds to pay for other qualified expenses or transfer those funds to another beneficiary with no tax consequence.
Some argue that a Roth IRA is a better way to save for college. That could be a good alternative. If that seems to be a better fit for your family, I say go for it! The main idea is just to save. College is insanely expensive and whatever way you choose to save for it, is still saving and that is a good thing. If you are able, do both! The below video from youtube.com gives a good explanation of 529 vs. Roth IRA to help you with this consideration.
OTHER BENEFITS OF 529 SAVINGS
The tax-free growth on a 529 plan is only one of the benefits. Here are some other benefits:
- ANY RELATIVE CAN CONTRIBUTE TO A 529 PLAN – This is a great opportunity for grandparents and other relatives to invest in your children! Some plans even have 529 plan gift cards to give a small gift.
- TAX CREDITS – Plans vary by state, but some plans give you state tax credits for your contributions. This is something that I have taken advantage of in my state for years. The credits go to the account owners so keep that in mind.
- ACCOUNTS ARE TRANSFERABLE – Future plans sometimes do not work out. That is life. 529 plans have a tool in place for that. If your child does not use the funds for education, you can transfer them to another beneficiary such as another child or relative.
THINGS TO KNOW
As with any investment, you will want to do your due diligence and make sure that you understand your particular plan and all the fine print. One thing to consider, especially in the case of grandparents of other relatives gifting a larger amount to a child’s 529 plan, is if that gift is over in one year $15,000 (the 2021 limit, which increases yearly for inflation), a gift tax return will need to be filed. It is totally fine to make larger contributions but just be aware of the filing obligation. Also, the tax credits are only available to the account owners, so if that is a parent, then they would get the credit.
SHOULD YOU OPEN A 529 ACCOUNT?
I personally believe that you can never go wrong in planning and saving for your financial future, and the future of your children. I have been on the opposite side of that I know fully well how much work it takes to dig yourself out of student debt. What if that time and energy was spent building my own future and becoming the best adult I could be? Trust me when I tell you that having your child start their adult life in debt is difficult path. Close your eyes and think of your child or relative and how fast they are growing up. Then think of how having a financial secure start to higher education could invest in them becoming the best adult that they can be. Then open your eyes and start looking at your state’s 529 plans. There is no time better to start than today!
Don’t know where to start? Next Adviser (with Time) has a great list of ways to save for college. Take a look here:
https://time.com/nextadvisor/banking/savings/how-to-save-for-college/
THE EARLIER YOU START SAVING IN A 529 PLAN, THE MORE TIME YOU HAVE FOR TAX-FREE GROWTH. GET STARTED NOW!
IF YOU WOULD LIKE TO READ OTHER ARTICLES LIKE THESE, HERE ARE SOME THAT YOU MIGHT LIKE!
Teaching KIDS about MONEY! Get started NOW!
ROTH IRA FOR TEENS! Why they should get one!
Keep personal record-keeping organized starting now!
EMERGENCY FUNDS – Yes! You should have one!
Dee | Grammy's Grid says
Great info for our kids and their future! Thanks so much for linking up with me at the Unlimited Link Party 28. Pinned!
simplyjolayne says
We have invested in 529 plans for our girls. Two of them are college age now and it makes such a difference in already having money saved.
cbrooks0312@comcast.net says
I am so glad that you have been able to see the “fruits of your labor” with using the 529 plans!
Haley Wright says
Very insightful!
Dee | Grammy's Grid says
Visiting again to say thanks so much for linking up with me at the Unlimited Link Party 29. Pinned again!
penpen says
As a grandparent with three grandkids nearing college, I feel great about funding 529s for them years ago. It is making a really big difference in helping them pay for parts of their first year or two of college. Their parents also saved via 529s. There is money there to help them pay for tuition and books. No need to go into debt. 529s deserve every positive word you wrote about them.
cbrooks0312@comcast.net says
I love that as a grandparent you did this! What a gift. I am saving for my own children via 529 plans and if I ever have grandchildren will do the same. It is so great that you have helped them to start their adult life without being saddled with debt.