Whether you are just starting to save for college for yourself or you’re thinking about saving for someone else, 529 plans are an option worth considering.
What’s a 529 plan?
529 College Savings Investment plans offer tax-free withdrawals when the money is used toward college education expenses. Some form of a 529 plan is offered in every state in the U.S., and the District of Columbia.
There are two types of 529 plans—pre-paid tuition plans and education savings plans.
Prepaid Tuition Plans
- Allow you to purchase credit at colleges and universities
- May only be used to pay for higher education
- May only be used to pay tuition (not other fees associated with attending school, such as room and board)
Education Savings Plans
- Allow for more freedom to choose a school, including any public or private college or university, sometimes even ones outside of the U.S.
- Allow withdrawals of up to $10,000 tax-free per year per student for tuition at any public, private, or religious elementary or secondary school
- May be used to pay tuition, fees, books and supplies, equipment required by school, room and board, and even digital devices such as computers and tablets if used for higher education
If you choose an Education Savings Plan, you may open it in any state that offers it as an option — even if you don’t live there. In fact, you don’t even have to open your plan in the state where the school you want to attend is located.
Benefits of 529 Plans
Because these plans vary by state, it’s important to discuss your options with a Wealth Advisor and take the time to do your research. Individual plans may have different benefits, but all 529 plans include these features.
- The funds in your plan are invested, and you don’t have to pay taxes on investment earnings unless you use funds for unqualified expenses.
- Withdrawals are tax-free when used for qualified education expenses.
- Anyone may contribute to 529 plans — not just the account owner.
- The beneficiary is transferable. For example, if the student ends up getting a full scholarship to college, the funds may be reallocated to another family member.
- Some states offer a state income tax deduction on contributions to 529 plans.
How much does a child need in college savings?
If you plan on sending your child to a four-year college, a good rule of thumb is to multiply the current age of your child by $2,500. This will estimate how much you will need to save for one year of college. This is assuming your child attends a public university and does not account for inflation or interest earned.