How to Save for a Child’s Future Education with a 529 Plan
Whether you have a toddler or a teenager, it is never too early to begin saving money for your child’s future education. In the following guide, learn how a 529 plan can help you put away tax-free money for your child’s future educational expenses. Read on to learn more.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to help families save for a child’s future education. 529 plans are authorized by Section 529 of the Internal Revenue Code and are legally known as “qualified tuition plans.” These plans are sponsored by states, state agencies, or educational institutions, and thus, many different 529 plans are available to the U.S. taxpayer. All fifty states and the District of Columbia sponsor at least one type of 529 plan.
There are two types of 529 plans: prepaid tuition plans and education savings plans.
Prepaid tuition plans are offered by some states and educational institutions as a way to lock in current tuition rates for applicable higher education institutions for a future student. With a prepaid tuition plan, you pre-pay all or part of the current cost of education at a participating college or university. Prepaid tuition plans do not cover the costs of room and board, nor are they accepted at all higher education institutions. Currently, prepaid tuition plans are offered in nine states and can only be used to attend in-state colleges or universities.
Education savings plans are more common than prepaid tuition plans. With these 529 plans, the account holder contributes money as investments that grow tax-free over time. Many education savings plans offer target-date funds, meaning the assets are adjusted and the investments become more conservative as the plan beneficiary gets closer to college-age. Funds in an education savings plan are widely applicable; they can be used for tuition, fees, and room and board for a variety of colleges and universities across the U.S. and even abroad in some cases. The funds can also be used for qualified expenses for K-12 private schools and boarding schools.
The SECURE Act of 2019 expanded tax-free 529 savings plans to include apprenticeship programs and up to $10,000 in student loan debt repayments for beneficiaries or their siblings. The SECURE Act of 2022 will permit up to $35,000 of unused funds in 529 savings plans to be rolled over into a Roth IRA account.
If you are interested in opening a 529 account for your child, we recommend going with an education savings plan. With an education savings plan, the beneficiary will have a wide range of options to choose from when it comes time to withdraw and use the funds. Now let’s take a look at some additional information you should know about 529 plans:
What Should I Know About a 529 Plan?
Starting a 529 plan for your child is a great way to put away money for college. Here is some additional information you’ll need to know about 529 plans:
- Easy to open and maintain – You can either open a 529 plan on your own or with the help of a financial advisor. The experts at Honest Buck can help you get started with your child’s 529 plan. We can help you shop for the best 529 plan for your family.
- Flexible plan location – Did you know you can live in one state, open a 529 plan belonging to another state, and then your child could use the funds to attend college in a third state? Each 529 plan offers investment portfolios tailored to the account owner’s timeline and risk tolerance. Your financial advisor can help you assess your options.
- Tax-deferred growth and tax-free withdrawals – A 529 plan is a great way to put away tax-deferred money for your child’s future education. In addition, as long as the funds are used at the correct time for eligible educational expenses, the withdrawals are tax-free.
- Tax-deductible contributions – The money you contribute to your child’s 529 plan is not deductible on federal taxes; however, more than 30 states provide tax deductions or credits of differing amounts for 529 plan contributions. Generally, you must opt for your state’s 529 plan if you want to take the deduction your state offers.
- High contribution limit – One of the great things about a 529 plan is that there is no annual contribution limit. However, you will want to keep a few things in mind with large contributions. First, contributions exceeding the annual gift tax exclusion ($17,000 in 2023) will count against your lifetime estate and gift tax exemption ($12.92 million in 2023). Second, the state sponsoring your 529 plan likely has an aggregate contribution limit, typically ranging from $235,000 to $550,000. Even so, the money you contribute to a 529 plan has the potential to grow considerably over the years leading up to your child’s higher education.
We encourage you to consider opening a 529 account to get a jump-start on saving for your child’s future education.
Reach out to the professionals at Honest Buck to explore your options for a 529 plan that works for your family.
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