6 Benefits of a 529 Plan

The 529 plan is one of the most popular ways to save for a child’s college expenses. As the cost of higher education continues to increase at an astronomical rate, it’s more important than ever to plan for your child’s college expenses using tax-advantaged accounts such as the 529. Below we’ve listed the several benefits of a 529 plan. 


1. Tax Benefits

The 529 plan allows earnings to grow tax-free. Meaning the money you invest in a 529 is never taxed unless you distribute the funds for nonqualified education expenses. Qualified expenses are withdrawn tax-free and can range from room and board to laptops.

Tax beneficial accounts should always be taken advantage of for their specific purposes, in this case, saving for college. Lastly, in many states, you can get a tax deduction or credit for contributions to a 529 account.

2. Stay in Control of the Account

As the owner of the account, you can ensure the money is used for its intended purpose. Unlike a taxable brokerage, or UGMA/UTMA account, the child has no legal rights to the money. As the owner, you can withdraw money at any time for any reason. However, keep in mind there’s a 10% penalty on money not used for education expenses.

3. Anyone can Contribute

Anyone can contribute to a 529. If you’ve let your family know you’ve opened a 529 account for your child to relieve some of the costs of attending college, the family can make contributions to the account as well.

4. Investment Options

529’s offer a variety of investment options ranging from mutual funds, ETF’s, risk-based, and age-based portfolios. We highly recommend automating the investment process with 529’s by linking a bank account and making monthly contributions. If you’ve saved up a good amount already, it may be smarter to make a lump sum contribution so the money can work in a tax-free account sooner. Lastly, reviewing the investments and progress at a minimum on an annual basis is a good idea to ensure the investment remains in line with your risk tolerance and timeline until your child begins college.

5. Front-Load Contributions

If you have a large amount of money already set aside for a child’s college expenses, 529’s allow you to front-load contributions. A contribution of $14,000 or $28,000 for married couples, qualifies for the annual federal gift tax exclusion. For wealthy individual’s, this allows you to give away money without counting against the 5 million lifetime exemption used for calculating estate taxes.

You may also make contributions up to 5 years worth of contributions in one year. For example, let’s say your parents want to fund your child’s education, and they have $100,000 set aside for that purpose. They are eligible to contribute the entire $100,000 to your 529 accounts benefiting your child in one year. This allows the money to grow tax-free sooner, with the end result being the child ends up with more money for college. In fact, it can benefit your parents as well by removing the $100,000 from their estate without having to pay any extra gift tax.

6. Can Change Beneficiaries

529 accounts allow the owner of the account to change its beneficiary without limitation. If your first child, whom the 529 is slated to benefit, doesn’t attend college or doesn’t use all the funds in the account, you can change the beneficiary to another child or family member. 529’s never expire, and they can be passed down from generation to generation.

The flexibility and tax benefits of 529 plans make it one of the best ways to fund college expenses. As a result of the new tax bill, 529’s can now fund K-12 education as well, in addition to college.

If you have questions about 529’s or how setting one up might be in your best interest, schedule a free consultation with us today.

 

Levi Sanchez

Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR and Co-Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!