Is getting a 529 plan the most effective way to save money for college? The answer, much like the majority of other things having to do with money, is that it depends! Find out more by reading this blog.
The answer, like almost everything else with money, is it depends! Let’s get into it.
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A 529 is a college savings plan that lets you save money for your child's college education. It is also called a "qualified tuition plan." 529 plans are run by the states. They get their name from the section of the Internal Revenue Code that they fall under. This means that each state can choose from a variety of plans. But you do not have to use your state's plan (you can contribute to a 529 savings plan in any state that offers one).
In this way, your money can grow without you having to pay federal income tax on it (no capital gains tax and no tax upon withdrawal). That being said, 529’s serve a very specific role. Giving you the opportunity to save tax-free for education sounds great, right?Â
But there are many limitations on how you can use expenses for. You can find yourself in a situation where you have to pay a 10% penalty on top of the tax hit you receive when you withdraw money from a 529 plan because you did not spend those expenses for higher education. This can be pretty egregious if you have multiple kids in college and you have saved a ton of money. Â
 In other words, 529 plans are investment accounts that have special tax breaks IF you use the funds for qualified education costs—and penalties if you don’t use the funds for education.
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Read more: Tips to Lower the Costs of College (Before & During)
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A client who had three children and was saving money for college many years ago. She set aside a few hundred thousand dollars for each child with the intention of enrolling them in California colleges. The first child finally received a full academic scholarship, the second child chose the military, and the third child received a full athletic scholarship. This woman had about $1 million in a 529 plan and was forced to pay taxes on that amount as well as a 10% penalty, which is extremely painful.
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So there you have it—a tale of how a 529 may go wrong.
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‍There are various accounts available, so you must consider what is most essential to you while saving for your child's education, such as options, flexibility, tax savings, etc.
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A 529 is a fantastic tool, but it must be utilized properly, and you must be aware of the trade-offs involved, so let's get started. You may save for education without paying taxes with a 529 plan. No matter how much money you make, you may open an account because you are the parent and have complete control over the funds. But you need to use the cash to cover your college expenses.
Note: There is no penalty for leaving leftover funds in a 529 plan after a student graduates or leaves college. However, you’ll face a 529 tax penalty and a withdrawal penalty if you use a 529 plan distribution on non-qualified expenses. You’ll have to pay income tax and a 529 withdrawal penalty of 10% on the earnings portion.Â
Here are the best Best 529 Plans Of 2022
Yup, the inevitable. College is very expensive and there's no sign of those college costs being lowered. Wait until 2036 if you thought attending college is pricey now. Four years at a prestigious university are predicted to cost a staggering $490,000, up from around $290,000 at the moment. Yes, that means that education expenses will double over the next two decades!
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Take a look at some of these college costs
The average cost of tuition alone for an Ivy League college was $59,985 for the 2022-23 academic year. The table below shows how much each of the eight schools charged in tuition, as well as the overall estimated cost of attendance. The institutions are listed in order from least expensive tuition to most expensive.
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So, judging by these numbers, if Millennial parents ever want to send their kids to college, they need to start saving RIGHT NOW.Â
‍Your biggest resource is time. As soon as you can, begin saving for college. The earlier you begin saving, the longer it will take for your funds to increase and your income to compound. Savings can potentially begin before the baby is even born. A third of your savings, if you start saving from birth, will come from your income. Less than 10% of the savings will come from earnings if you wait until the child starts high school to start saving.
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A simple savings account or a basic investment brokerage account will do the trick when it comes to saving for your child's college costs. For example, if you can put your kid's savings in a regular savings account for now and then speak with an advisor to decide where is the best place to move it into an investment account. This way your family will have the flexibility to help fund whatever future plans your son/daughter creates for themselves.
You may also consider setting up a UTMA (Unified Trust for Minors Account).
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Speak with an advisor to get started with your UTMA today!
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It's a savings account for your child that you manage while your child is still a minor. When your child turns 21, they become the owner of the money and can use it for anything. This gives you and your child full control over how the money is spent, regardless of whether they use it for college or not.
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One of the most popular methods to save for college is through a 529 plan but it is not necessarily the greatest approach.Â
Learn how to save *big bucks* with the “Master College Funding” Course.
‍By the end of this course, you’ll have the tools and knowledge to save THOUSANDS on college costs. Good planning combined with an understanding of how merit based and need based financial aid work can significantly lower your college bill.
‍Speak with an advisor at Vincere Wealth (Josh’s affiliated financial planning company) to find out if this is the right move for you and your family today! If not, they can find the RIGHT solution suited to your goals and plans!
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