Between normal, day-to-day expenses and long-term goals such as retirement, figuring out how – and how much – to save for your child's education can be challenging. One financial strategy you might consider? Setting up a 529 plan.
A 529 plan is an investment account that follows the principles of quality and diversification. Furthermore, a 529 plan offers several other key advantages, including the following:
- Flexibility – As the account owner, you make the investment decisions and choose the beneficiary. And if the child you've named decides not to attend college, you can generally change the beneficiary to another eligible family member.
- High contribution limits – Contribution limits depend on the state's plan but are typically well more than $200,000. You can give up to $15,000 per year, per beneficiary, or $30,000 if you're giving as a married couple, without incurring federal gift taxes.
- Potential tax benefits – 529 plan earnings and withdrawals are federally income tax free and penalty free, as long as the money is used for qualified education expenses.1 Also, you could receive a state income tax incentive for contributing to your own state's 529 plan.2
Be aware, though, that a 529 plan can affect financial aid. Well before your child heads off to school, you may want to consult with a college's financial aid office for ideas on maximizing your plan.
New uses for 529 plans
In recent years, new laws have expanded the potential uses of 529 plans. Now, they can also pay for qualified K-12 expenses as well as costs associated with apprenticeship programs offered at trade schools and community colleges and registered with the U.S. Department of Labor. And the unused portions of 529 plans can be used to repay certain student loans, up to a $10,000 limit.
Look at the “big picture”
A 529 plan can be a great help in paying for your children's advanced education. But you may also want to place this account within a broader education savings strategy that addresses issues such as balancing college savings with planning for retirement. Your financial advisor can help you develop a strategy for today – and tomorrow.
1 Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes as well as an additional 10% penalty.
2 Contributions are tax-deductible in certain states for residents who participate in their own state's plan. Because tax issues for 529 plans can be complex, please consult your tax advisor.