Education is a key factor in predicting whether a person will be financially successful in life. This is why many parents strongly encourage their children to do well in school when they are young so they can be ready for college. Many millennials are now at the age where their children are going to middle school or high school which means they are probably thinking about how they are going to provide their kids with a higher education after high school.
Unfortunately, the cost of a college education has continued to climb higher at a rapid pace and has been moving in this direction for many years. This means many parents are looking to find ways to raise the funds necessary to send their children to college.
Many parents have found success in using a 529 plan to accumulate enough capital to pay for higher education for their children.
What is a 529 plan?
Created to assist in saving for college costs, the 529 plan is a tax-advantage savings plan that is named after the section of the Internal Revenue Code which resulted in this type of savings account’s existence. The 529 plan, legally referred to as “qualified tuition plans,” was initially envisioned to cover only postsecondary education but in 2017 lawmakers expanded its coverage to K-12 education. In 2019 the 529 plan was expanded again to cover apprenticeships.
There are two different types of 529 plans: education savings plans and prepaid tuition plans. The education savings plan allows your savings to be invested and accumulate tax-deferred returns. Alternatively, prepaid tuition plans are geared towards allowing you to lock in lower tuition rates by allowing you to prepay tuition at current rates to attend college at a future time.
Who can open a 529 plan?
Any individual adult and even some corporations are allowed to open a 529 plan. Even students who are over the age of 18 years can open a plan in order to save for their own education costs. However, usually parents or grandparents are the ones most commonly establishing 529 plans for the benefit of their children and grandchildren.
With a 529 plan, as aforementioned, your savings can grow without having to pay taxes on the gains and income derived from investments. Even upon withdrawal you will not incur tax liabilities as long as you use the withdrawn funds for what the Internal Revenue Service (IRS) deems qualified educational expenses. However, you should be aware that there is a $10,000 annual limit on tax-free withdrawals for K-12 educational costs.
Some states may even allow you to deduct contributions to a 529 plan on your tax returns. You will want to talk to a financial professional to find out if this pertains to your particular state.
Is a 529 plan right for your educational needs?
As you can see there are considerable advantages to using a 529 plan to fund educational costs. Not only are there tax advantages, but these plans can also help to lock in a lower tuition rate. However, there are also various other strategies available for saving for educational expenses and tuition fees that you may want to take a look at. Perhaps a mix of different strategies is the best way for you.
Here at Rademacher Financial, planning for your children or loved ones education, is of the upmost importance! Please give us a call and we will work together to see if a 529 plan is the best route for you!
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As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.