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As a parent, you want to do everything in your power to make sure that your children have a better life than what you’ve had. By ‘better’ I mean not being balled-and-chained to a load of debt, especially student loans.
The horror of my student loans is still a present nightmare. I didn’t have anyone saving for my education because my parents “didn’t have it” but when you know better you do better!
Even just $20 a month could make a huge difference long-term.
I declared that there was no way in the fiery pits of hell that I’d let my kids go through the same torture. After hours of browsing through numerous search results and a talk with a friend, I decided that a 529 Savings Plan was the way to go.
Here’s everything you need to know to make an informed decision!
What is a 529 Savings Plan?
I asked the same thing.
A 529 Savings Plan is an account operated by a state, state agency, or educational institution that allows you to set money aside for college. The idea is to save for educational expenses such as tuition, room and board, and supplies.
This plan can be used at any accredited college or university in any state.
The growth in a 529 Savings Plan is tax-free, and withdrawals will never be taxed as long as the funds are used for the sole purpose of higher education.
Maximum contributions typically range between $300,000 and $500,000.
Who can open an account?
Any U.S. resident who is 18 years-of-age or older can set up a 529 Savings Plan, regardless of their income.
If you’re nervous that Little Tommy is going to view the account balance as a way to buy all of the pairs of shoes you never let him have—rest assured. All account owners maintain control over the plan even after beneficiaries have reached legal age.
This means that the beneficiary will never hold rights, so the account owner manages all withdrawals.
Good thing is that contributions to a 529 Savings Plan do not have to be made solely by account owners. Family and friends may also contribute to the account electronically or by check.
A private dashboard can be set up to track gifts, send out invitations, and more!
Click to pin!
Who can be a beneficiary?
Pretty much anyone can be a designated beneficiary, whether they are a child or an adult. You can even list yourself as a beneficiary to help cover your educational costs!
Beneficiaries can be changed at your discretion, normally without penalties, and during this time investment options can also be adjusted.
Are there any tax benefits?
The money in a 529 Savings Plan is not subject to federal taxes. This means that your savings can grow at a faster rate than if it were placed into a taxable account.
In addition to being tax-deferred, withdrawals may qualify for the gift tax exclusion. Contributions are not included in your estate, and certain plans may even be eligible for a state tax deduction!
In my home state of Arkansas, $15,000 ($30,000 if married) can be contributed per beneficiary without being subject to the federal gift tax. I can also deduct up to $5,000 ($10,000 if married) of my contributions from my adjusted gross income!
When you decide on which state’s plan is right for you, be sure to look over the contribution limits and any tax benefits you may qualify for.
Are there any penalties?
As with any good thing, there are some downfalls to a 529 Savings Plan. Womp womp.
If you decide to withdraw funds from these accounts that aren’t used for qualified educational expenses, then you risk paying a 10% penalty on the earnings portion. State or local tax may also be added to the 10% penalty.
For a 529 Savings Plan, there are two types of investment options: age-based and custom strategy.
Age-based: This investment option is the most common because the investments are managed for you and automatically adjust over time. Assets are subject to a higher percentage of stocks while the beneficiary is young, but then gradually changes to a cash and bond portfolio as they reach legal age.
As the beneficiary ages, assets become less of a risk.
Custom strategy: This investment option maintains the same allocations for investment funds or groups of funds. Account owners can build their own investment strategies that suit their individual needs and risk levels.
More money-related posts to read:
How will this affect financial aid eligibility?
I know what you’re thinking…can they still get financial aid?!
Investments in a 529 Savings Plan will typically affect financial aid eligibility but may be minimal. Plans that are set up by custodial parents are considered assets and therefore included in the Expected Family Contribution (EFC) calculation.
Luckily, the first $20,000 of parental assets is not counted in the EFC calculation since it falls under the asset protection allowance.
If more has been saved, only around 5.64% is counted.
What if my child/beneficiary gets a scholarship?
If scholarships are received by beneficiaries, account owners may withdraw the amount of the scholarship without facing a 10% penalty. However, taxes still apply to the growth portion.
What if my child/beneficiary doesn’t go to college?
Sometimes people decide that college is just not right for them, and that is O.K.
Do not panic. The money in your 529 Savings Plan will not just simply disappear.
You still have several options if your beneficiary chooses not to pursue higher education.
Keep the account open
When someone says that they are not interested in going to college, it does not mean that they won’t eventually change their minds.
Instead of closing out the account, keep your 529 Plan open and when the beneficiary is ready to attend college the funds will be there to use.
Change the beneficiary
If the current beneficiary is not going to use the funds you can always change the beneficiary to another family member or other qualified person.
Consider a trade/vocational school
If a four-year institution does not sound appealing to your beneficiary, there are still other options.
A 529 Savings Plan may also be used at accredited trade and vocational schools, community colleges, or other post-secondary educational institutions that participate in student aid programs.
Use the money for other purposes
When all else fails, you can still use the money in your 529 Savings Plan for other purposes outside of education. Just be sure to remember that withdrawals will be subject to a 10% federal penalty.
How much will this cost me?
Ah, yes. This is the question that comes to mind when something appears to be too much of a good thing.
Depending upon the state, you can open an account for as little as $10 a month (your contribution) or maybe even less.
Contributions can be made directly from:
- Electronic withdrawals from your bank account.
Keep in mind that fees may be applied to your account for enrollment, annual management, and asset management. These fees may be waived if you maintain a large balance, sign up for automatic contributions, or are a resident of the plan’s state.
Additional fees may also apply if you purchased your plan through a financial professional.
In my personal experience, I have not come across any fees but remember to stay up-to-date on the rules and fees of your plan as they are subject to change at any time.
How do I enroll?
You can enroll in a 529 Savings Plan directly through the plan manager (the state’s site) or a financial adviser.
To open mine, I went through an electronic process through my state’s 529 plan’s website. It’s similar to opening a bank account online so be prepared to have your information readily available such as:
- Social security numbers
- Home and mailing addresses
- Bank routing and account number
Use the 529 finder to compare each state’s plan.