Saving for a kid’s education is important for many reasons. The cost of higher education is increasing rapidly, and it will likely continue to do so in the future. By saving for education, parents can help ensure their children have the resources they need to pursue their dreams without incurring excessive student loan debt. Saving for education can ensure children can pursue any career. They won't be limited by financial constraints. As a parent, saving for education is one way to fulfill a responsibility to set them up for the future. Hopefully, it can also teach children the importance of planning, saving, and responsible financial management. At our firm, our Spokane financial advisors recommend taking advantage of 529 plans.
Who should have a 529?
Parents of young children: Starting a 529 account when your child is young can help you save for their future college expenses. The earlier you start, the more time your investments must grow.
Grandparents: Grandparents can also open a 529 account for their grandchildren. This can be a great way to help your grandchildren pay for college and provide a gift that can last a lifetime.
Anyone planning to attend college: 529 accounts are not just for children. Anyone can open a 529 account and use the funds to pay for their education expenses.
High-net-worth individuals: 529 accounts can be a good way for high-net-worth individuals to transfer wealth to their children or grandchildren while also receiving tax benefits.
People who live in states with tax incentives: Many states offer tax incentives for contributing to a 529 account. If you live in one of these states, it may make sense to open a 529 account to take advantage of the tax benefits.
Benefits
Tax advantages: One of the primary benefits of a 529 account is its tax advantages. Contributions to a 529 account grow tax-free, and withdrawals used for qualified education expenses are also tax-free at the federal level. Some states also offer tax benefits for contributions to a 529 account. This benefits high-income earners who want to save for education expenses while minimizing their tax burden.
Flexibility: 529 accounts allow you to use the funds for various educational expenses, including tuition, fees, books, supplies, and room and board. This account makes them an excellent choice for anyone planning to attend college and parents who want to save for their children's future education expenses.
High contribution limits: Another benefit of a 529 account is the high contribution limits, up to $17,000 per year, with an option to use five future years' contributions in one year. This rule allows parents and grandparents to save significant money for their children's education without worrying about hitting contribution limits.
Estate planning benefits: 529 accounts can also be helpful for estate planning purposes. Contributions to a 529 account are considered complete gifts. This benefit is for high-net-worth individuals who want to transfer wealth to their children or grandchildren while reducing their taxable estate. Additionally, 529 accounts allow for accelerated gifting, which means you can make up to five years' worth of contributions at once without triggering the gift tax.
Drawbacks
Limited investment options: Many 529 plans offer a limited number of investment options, which may only be suitable for some. If you want more flexibility and control over your investments, there may be better choices than a 529 account.
Penalties for non-qualified expenses: If you withdraw funds from a 529 account for non-qualified expenses, you may be subject to taxes and penalties. This plan can be a drawback for anyone who wants to use the funds for something other than education expenses.
Impact on financial aid eligibility: The funds in a 529 account are considered an asset of the account owner, which can impact financial aid eligibility. This account can be a drawback for families relying on financial aid to pay for college.
State-specific plans: Each state has its own 529 plan, and the benefits and drawbacks of these plans can vary. It's essential to research the plan options in your state and compare them to plans in other states to ensure that you are choosing the best plan for your needs.
Common misconceptions
529 accounts can only be used for college: While 529 accounts are often associated with college savings, they can also be used to pay for other qualified education expenses. These can include tuition and fees for K-12 education, apprenticeship programs, and certain vocational schools.
You can only use a 529 account in the state where it was opened: This is not true. 529 accounts are portable and can be used to pay for qualified education expenses at any eligible institution in the United States and some institutions abroad.
If you don't use the funds in a 529 account, you'll lose money. This is wrong. If the beneficiary of a 529 account does not use all the funds in the account, the account owner can change the beneficiary to another family member. Or if they like, they can withdraw the funds for their own personal education expenses like taking night courses at a local college or online courses.
You can't use 529 account funds to pay for non-education expenses: While there are tax penalties for using 529 account funds for non-qualified expenses, account owners have some flexibility when using the funds. For example, they can use them to pay for certain housing expenses if the beneficiary is enrolled at least half-time.
Additionally
The SECURE Act 2.0 has made a change to 529 plans. Beneficiaries that don't use all their funds can now choose to roll over their 529 funds to a Roth IRA up to a lifetime amount of $35,000. For example, unused 529 funds could be rolled over to a Roth IRA and used for a downpayment on a home. This change gives a great opportunity for parents to help their kids with education and a financial start in life while using tax-free growth and avoiding penalties.
In Conclusion
529 plans offer a range of benefits that can help families save for education expenses and make the most of their investments. If you are late to the game, it may not be worth it to set up a 529. But if you plan, you can take advantage of this huge benefit of tax-free growth. Don't delay acting. Start now by booking a time to talk with our Spokane Financial Advisor about education financing. It's never too late to start planning, saving, and being a good steward of your finances.
About the Author
Noah Schwab CFP® is a financial advisor in Spokane, Washington specializing in helping Spokane small business owners.
- Synergizing business and personal finances
- Setting up retirement plans
- Investment management
Resources:
About 529 plans: Link
College education: Link
