If paying for your child’s college education is one of your financial goals (and even if it’s not), you’ve probably heard you should start saving in a 529 plan. Here’s the lowdown on what a 529 plan is, the benefits, the potential downsides and generally, how much you want to be putting aside for your child’s education.
A 529 plan is a tax-advantaged way to save up for your child’s college education via plans offered by a state or educational institution.
There are two types:
Income tax breaks. The earnings on your investments are not taxed and you also don’t pay tax when you withdraw the money to pay for college / qualified education expenses.
State tax breaks. Some states offer tax deductions on the plans as well! Check your state here.
Can change the beneficiary. If you want to change the recipient of the funds, you can!
Set it and forget it. 529 plans make it easy to set up automatic contributions so you are creating the space and habit to save for college expenses.
10% penalty. If you use the funds for anything other than a qualifying college expense, you will incur a 10% penalty plus income tax on any earnings.
Fees. We want to be fee ninjas when it comes to our 529 plans just like we would any other area of our personal finances. Watch out for high broker fees and fund expense ratios!
Financial aid. Something to note: 529 plans are reported as parental assets on the financial aid application.
While it’s helpful to know how much you want to be contributing now to pay for your child’s education, the numbers can be pretty daunting. If a 529 plan is a good option for you, use an online calculator to get an idea of your contributions but don’t let that deter you from getting started. Even a small contribution over time can make a big difference and it builds momentum for larger contributions going forward.