529 college savings plans—what you need to know!
In this brief video, learn about benefits, tax incentives, who can be a beneficiary, and how 529 college savings plans differ from prepaid tuition plans.
(The video is 4 minutes. Full transcript is below.)
Full Transcript of video
Hello, I’m Josh Duncan with SCB News bringing you this edition of Financial Freedom. The purpose of Financial Freedom is to provide tips to help you achieve financial freedom for personal significance.
College savings is near and dear to many parents and grandparents. With the cost of college rising at a higher rate than inflation, preparing for these expenses can be challenging. Additionally, the variance of costs across institutions adds another layer of complexity.
The 529 college savings plan
Although there are different ways to pay for college, today I’m going to discuss the 529 college savings plan. The 529 plan was created in the Small Business Job Protection Act of 1996. This is by far the most popular education savings vehicle used today.
Benefits and downsides of prepaid tuition
These plans can be for prepaid tuition or a savings plan. Prepaid tuition is as it sounds. However, since these plans are operated by states and institutions, the school selection is limited. The benefit of the prepaid tuition plan is paying for future semesters of school at today’s prices. This protects from the inflation of college prices.
Another downside of the prepaid plan is the restrictions on the covered expenses. For example, you may still have to pay for books and room and board out of pocket. These expenses can add up fast.
The 529 savings plan is more flexible
The savings plan is more flexible. First, the money added to the savings plan can be invested to grow. Now, this does present some risk and may require managing the money to be more conservative over time. Many plans have options that automatically become more conservative as the beneficiary nears age eighteen. The benefit of the money growing beyond what is saved is great!
Is growth on your savings taxed?
If you are wondering if the growth on the savings is taxed, the answer is no. As long as the money is used for qualified education expenses, then no tax is paid on the growth. Now, if you decide to buy a boat instead of using it for college, you will pay tax on the growth and a ten percent penalty. Following the rules will pay off.
Changing the beneficiary of your 529 college savings plan
If your child decides not to attend college, you can change the beneficiary on your 529 savings plan to an approved family member. Then, they can use the funds for education. Plus, if you were thinking of going back to school, the money is available to you.
Some states offer tax incentives
Some states offer another tax incentive for contributing to their 529 plan. You may be able to take a state income tax deduction by making contributions. Each state has different rules, so I cannot cover them all here. Check with your state’s plan for more details. Also, you need to consider this tax benefit before contributing to a plan sponsored by a non-resident state.
Who can contribute?
The 529 Plans can accept contributions from anyone, such as parents, grandparents, and other family and friends. Some families ask family members to make 529 contributions as part of their children’s birthday gifts. The point is the savings plan offers a lot of flexibility.
How do I pay for college expenses? What about reimbursements?
When it comes time to pay for college expense form the 529 savings plan, checks can be issued to the institution. Reimbursements can be made as well. The key is to ensure the expenses are qualified education expenses. Generally, this means expenses that are required by the institution. For example, fraternity and sorority fees are not qualified expenses.
An easy way to save for college with tax-free growth and income-tax deductions
As you can see, the 529 Plans offer a great benefit for students, parents and grandparents. This is an easy way to save for college with tax-free growth and income-tax deductions. Your financial advisor can point you in the right direction and build a plan for how much to save. Now is the time to start.
Thank you for joining me for Financial Freedom. I'm Josh Duncan, Financial Advisor with F5 Financial Planning, helping you achieve financial freedom for personal significance. Please send topics you would like me to cover to firstname.lastname@example.org. See you next time.
Photo credit: rawpixel.com
Most recent Financial Freedom Tips video blog post:
F5 Financial is a fee-only wealth management firm with a holistic approach to financial planning, personal goals, and behavioral change. Through our F5 Process, we provide insight and tailored strategies that inspire and equip our clients to enjoy a life of significance and financial freedom.
F5 Financial provides fee-only financial planning services to Naperville, Plainfield, Bolingbrook, Aurora, Oswego, Geneva, St. Charles, Wheaton, Glen Ellyn, Lisle, Chicago and the surrounding communities; to McDonough, Henry County, Fayette County, Atlanta and the surrounding communities; to Venice, Sarasota, Fort Myers, Port Charlotte, Cape Coral, Osprey, North Port, and the surrounding communities; and nationally.
We'd love to have the opportunity to hear about your situation. Contact us here to schedule an appointment for a consultation.
Helping You With
Wealth Preservation – Wealth Enhancement – Wealth Transfer – Wealth Protection – Charitable Giving