How to use a 529 Plan to Save for your Children’s Future Education
If you already have children or maybe one on the way you have probably already thought about future education expenses. With the cost of college rising it can be a daunting thought, but if you start saving early it doesn’t have to be. There are many ways you can save for your children’s future education. One
What is a 529 plan?
529 plans are named after section 529 of the Internal Revenue Code. A 529 plan is a tax advantaged savings plan that allows you to save for future educational expenses. Eligible educational expenses include colleges, vocational schools, and other post-secondary schools. They can also be used for qualifying expenses outside of tuition such as, room & board, meal plans, computer & software, along with several other expenses related to schooling.
How are they taxed?
Your contributions to a 529 plan don’t reduce your federal tax burden but, assuming distributions are used for a qualified expense the earnings are not taxed. It’s important to make sure you are only using the funds for qualified expenses otherwise there is a 10% penalty along with taxes owed levied against you.
What types of plans are there?
There are different types of 529 plans, a college savings plan or a pre-paid tuition plan. A college savings plan allows for your child to choose the institution they would like to attend, while a pre-paid tuition plan pre-pays for tuition at a specific school. Many states offer a 529 plan but depending on where you live it’s important to check out the benefits of your state’s plan. It is also important to evaluate the benefits and features of each plan as they can differ greatly. You also want to be aware of the investment options available and fees associated with the plan.
Why should you start saving right away?
The most important factor in utilizing a 529 plan is starting early. The earlier you start saving the more you are able to take advantage of the compounding effect on earnings. For example, if you began saving $100 a month the week your child is born by the time they are 18, you will have saved around $37,000 assuming a 6% rate of return. If you wait until age 5 you will have saved $22,000. If you wait 10 years to begin saving you will have around $12,000 saved.
Saving for college doesn’t have to be scary, but it’s important to start as early as possible.
Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).
- How to use a 529 Plan to Save for your Children’s Future Education - August 24, 2020