Saving for a college education is on most to-do lists. Whether you are saving for your children or your grandchildren, choosing the right kind of savings account is important. While there are many types, a 529 college savings plan is a great choice when it comes to saving money for a college education.
Strategies to Save for a College Education
529 plans are named after Section 529 of the Internal Revenue Code. This was added in 1996 to authorize tax-free status for qualified tuition programs. With a 529 plan, your contributions are made with post-tax money and these contributions are invested. Investments are based on the plan you choose and which level of risk you are comfortable with. Earnings will accumulate on a tax-free basis and won’t be taxed federally when they are used.
Qualified Tuition Programs
529 plans can be used to pay for college costs at any qualified college nationwide and you can invest in almost any state’s 529 plans, not just your state of residency. There is a common misconception that 529 plans are very limited. The fact is, it’s a very flexible plan and makes saving for a college education a lot easier than you might think.
With most plans, your choice of college is not affected by the state that sponsored your 529 college savings plan. This means you can be a Georgia resident, invest in a California plan and send your student to a college in New York. 529 plans are accepted at more than 6,000 U.S. colleges and universities and over 400 foreign institutions.
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Do All States Offer 529 Plans?
Nearly all states offer a 529 plan, but each state’s plan will look different. So, it’s important to research the features of each plan and which benefits it has to offer. Your financial advisor can help you understand your options and choose the one best suited for your goals.
529 plans have special tax benefits if the basic requirements are met. These benefits include a 5-year gift tax front-loading and tax-free qualified distributions. Some states, like Virginia, also offer state income tax incentives to investors in the state 529 plan.
Tax benefits can include state income tax deductions and tax credits for contributions to the plan. If the couple is married, they extend the tax credits to both parents up to a certain contribution limit. This is another thing to consider when choosing which 529 plan you want to invest in.
How It Works
529 college savings plans function like a Roth IRA. After-tax contributions are invested into mutual funds or similar investments. Each plan will offer several different investment options to choose from and the account will increase or decrease in value based on the performance of the investments.
Earnings growth is tax-free, and withdrawals will be tax-free as well. Funds can be used for any qualified education expenses including tuition, fees, books, equipment, supplies, computers and sometimes room and board.
Furthermore, the IRS allows tax-free withdrawals of up to $10,000 per year per beneficiary, to pay for tuition expenses at private, public, or religious K-12 schools. And tax-free distributions can be used to repay federal and private student loans.
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A Little Goes a Long Way
More often than not, people think they can’t afford a 529 plan. On the contrary, most plans are extremely affordable. Sometimes monthly payments are as low as $25 dollars and you probably spend more than that at Starbucks each month. If you can only afford $100 a month, that still adds up to nearly $35,000 over 18 years and that’s not including the earnings from your investment. Even small contributions add up to a significant amount.
Some people like to set up an automated monthly deposit. It is convenient and hassle-free and can help build in a discipline and consistency to your investing. Other people prefer to make lump-sum contributions. Whichever you prefer is fine because with a 529 college savings plan you can contribute what you want, when you want.
College Planning Financial Advisor in Northern Virginia
If you are ready to start saving for college education expenses for a loved one, the 529 plan is a great choice. It is flexible, offers several tax advantages, and allows you to maintain control over the account. To learn more about this opportunity, please contact Argent Bridge Advisors today.