Parents of young children face a daunting prospect: Setting aside a college savings account for their kids, despite a daily onslaught of headlines about the rising cost of school tuition. Certainly, the future of academics is an open question, yet the need for careful planning remains. Fortunately, there are investment tools parents can use to stretch their college savings dollars as far as possible, and to prepare for all contingencies.
One of the most enduringly popular college savings vehicles is the 529 savings plan. Tried and true, the 529 still offers some potential benefits for parents looking to set aside some college dollars. But is it the right investment vehicle for you and your family?
The Benefits of a 529 College Savings Plan
A 529 plan is an account where you set aside money that’s specifically earmarked for college-related expenses. It offers investors a few key benefits:
- It allows for a relatively high annual contribution.
- It allows for tax-free accumulation, just so long as the plan is funded.
- It helps contributors steer clear of the gift tax.
- So long as it’s used for qualified educational purposes, the 529 allows for tax-free distribution.
Another note: Due to the recent tax reform legislation, 529 funds can actually be used for academic expenses before college—something that was never the case before 2018. Now, however, you can use up to $10,000 in 529 fund each year to pay for home schooling, public school expenses, private or religious schooling tuition, etc.
Are There Any Downsides to the 529?
As for potential downsides, it’s important to understand that the money in your 529 plan has to be used for qualified educational expenses—and that’s defined fairly narrowly. Generally, it means room, board, tuition, and books—that’s it.
And, while it’s always good to have a college plan in place, it’s always possible that your kids will either choose not to go to college, or they may not need the money—for example, if they qualify for in-state tuition or for major financial aid. If this happens, you can transfer the 529 to another beneficiary, or you can use it on non-educational expenses—but you’ll incur some taxes and penalties.
Not All 529s Are Created Equal
Finally, it’s important to note that there are actually different 529 plans available in almost every state—and it’s important to know the specific regulations that affect 529s where you live.
Likewise, it’s important to find an investment advisor who understands how 529 plans work in your state, and who can advise you on whether the 529 is really the right investment vehicle for you and your family.
Stonepath Wealth Management has ample experience advising clients in the merits of 529 plans, and we’d love to consult with you on how your family can best prepare for future college needs. Reach out to our advisors today to set up a consultation.