Having children creates a host of concerns, the least of which is how to save money for college. On top of paying for sports equipment, piano lessons and karate classes, parents’ thoughts soon turn to paying for tuition, books and housing. But a little early planning can help mitigate a lot of worrying down the road, and a lot of people find that a 529 College Savings Plan is a good solution.
What is a 529 Plan?
Developed in 1996, 529 plans were designed to help families save money for higher education without paying taxes on the investment. As such, 529 plans are exempt from federal taxes if the proceeds are used for qualified higher education purposes. Most states, including Colorado, will also allow you to deduct your contributions to the plan for state tax purposes.
Any adult can open a 529 plan account for themselves or for someone else, usually a child or grandchild. Another benefit of such a plan is that anyone, whether they own the account or not, can contribute to the account. So if you open an account for your child, anyone you know can make a contribution directly to the account.
The biggest stipulation is simply that the funds, when withdrawn, are used to pay qualified higher education costs. Depending on the specifics of your plan, these costs typically include tuition, books and room and board. (source)
Colorado is one of the few states that also matches certain contributions for low- and middle-class families who open a 529 plan. If the account is for a Colorado resident, the state may provide a matching grant, although there may be additional stipulations as to what the funds can be used for. (source)
As with other investments, there are fees involved with creating a 529 Plan. These usually include a program management fee, investment fees and a fee for opening the account. Your financial advisor can help you select a plan that finds a balance between the fees involved and money-saving deductions.
Each state imposes a maximum amount that can be held by an individual, so it is important to make sure you don’t overfund the account, (or accounts, if more than one has been created for an individual). Colorado’s accumulative limit is $350,000. (source)
How Can a 529 Plan Help Me?
There are several advantages to using a 529 plan over traditional college saving methods. Here are five of the more notable benefits:
- All money in the plan grows tax-free if withdrawals are used to pay qualified higher education costs.
- Contributions can be made through a variety of means, including automatic account transfers and payroll deductions.
- Funds can be used at almost any accredited college in the U.S., and even some abroad!
- Most plans have a low monthly minimum contribution, so people of most income levels can participate.
- Assets in the plan are safeguarded from bankruptcy (source)
Parents look forward to the day when they send their children off to college, but the prospect of paying for tuition often feels daunting. Meeting with a financial planner and selecting a 529 Plan that meets your needs will give you the peace of mind of knowing that the costs of your child’s education could be covered. Then, all you’ll need to worry about are your child’s grades, SAT scores, and the friends they hang out with.
Remember, at SH&J we recommend you save for your retirement BEFORE saving for college. Contact us today to discuss the next steps for your retirement and college savings.
Do you have a 529 Plan? Did your family save for your college education or did you have to figure it out for yourself? Share your story with us in the comments.