Saving for College with a 529 Account
More and more parents are stepping in to assist their children with future college expenses. After hearing countless stories about young graduates shackled by student loans, parents today are trying to help their children avoid the same fate.
However, as the cost of higher education continues to rise annually, many wonder what’s the best way to save for future college expenses. One of the most popular options is a 529 account.
What is a 529 Account?
A 529 account is a state-sponsored, tax-advantaged savings account specifically for education costs. It’s one of the most widely used savings tools because it provides tax benefits, including tax-free withdrawals on qualifying educational expenses.
There are two types of 529 accounts:
529 College Savings Plan: Of the two options, this is the most popular. Nearly all states offer a 529 college savings plan, and it provides the most flexibility in how and where you can spend your funds.
529 Pre-Paid Tuition Plan: These plans are only available in a limited number of states. They allow you to lock in today’s tuition price, which will likely be much lower than when your child heads to school. However, the funds can only be used at designated schools, do not cover room and board, and cannot be used toward elementary or secondary schools.
The remainder of this article will focus on 529 College Savings Plans since they’re the most common, offer the greatest flexibility, and are available nationwide.
How Does a 529 Account Work?
When you open a 529 account, you’ll first need to list a beneficiary. Typically, a parent will list their child as the beneficiary, but you could list yourself if you plan to pursue higher education like graduate school.
Then, you can begin making contributions to the account.
All contributions are made on an after-tax basis.
Earnings will grow tax-deferred until you make withdrawals.
Future withdrawals made toward qualifying expenses will be tax-free.
As the account holder, you can choose how to invest your funds – typically through mutual funds. Most 529 accounts offer targeted investments that become more conservative as the child gets closer to attending college.
Common Features of 529 Accounts:
These college savings accounts are advantageous as well as versatile.
No Minimums: There are typically no minimum deposits or required monthly contributions to maintain a 529 account.
Single Beneficiary: You can only list one person as a beneficiary on a 529 account. Parents with several children do not need to open multiple 529 accounts unless they are very close in age. For example, if you have children several years apart, you can use the 529 for the oldest child. Once they graduate college, you can change the beneficiary to your next child heading to school.
Anyone Can Contribute: Whether relatives or friends, anyone can contribute to your 529 account. As college costs rise, it’s becoming more common for parents to ask for donations to their child’s 529 account instead of other gifts for birthdays and holidays.
Early Withdrawals: If you withdraw money from the 529 account early or for non-educational expenses, you’ll typically have to pay a 10% penalty along with taxes on the earnings.
Scholarship Reimbursement: If your child receives a scholarship, you can withdraw that amount from your 529 account without paying the 10% penalty. However, you’ll still be required to pay taxes on the earnings.
Where Can You Use a 529 Account?
While 529 accounts are known as college-saving plans, they can be used toward other educational opportunities, including:
Any accredited college or university
Qualifying trade schools
Certain apprenticeship programs
K-12 (elementary or secondary schools) – up to $10,000 annually per beneficiary
What Expenses Qualify?
You can make tax-free withdrawals from your 529 account to cover any of the following college-related costs:
Tuition and fees
Room and board (including off-campus housing)
Books and supplies
Computers and software
Student loan payments
What If My Child Doesn’t Attend College?
Not all children will attend college. In that case, you have four general options:
Change the Beneficiary: If your oldest child decides not to attend college, you can change the beneficiary to your next oldest child. Then, use the funds on their schooling.
Maintain the Account: A 529 account never expires. You can keep the account open and let the funds grow tax deferred as long as you like. You might save the funds and list a grandchild as a beneficiary in the future.
Use the Money Yourself: If you have always wanted to go back to school and pursue a new degree, you can name yourself as the beneficiary.
Withdraw the Money: You can withdraw the money; however, you’ll be subject to a 10% penalty and must pay taxes on applicable earnings.
We’re Here to Help!
Helping your child afford a college education can be a rewarding experience. As with all investments, time is your best friend. The sooner you begin saving, the better. Even small contributions made regularly can grow into a substantial sum with time.
If you’re interested in speaking with a financial advisor about opening a 529 account, we’re happy to help. Please call (540) 400-7611 to schedule an appointment with Freedom First Wealth Management today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.