Have you heard of 529 college savings plans? If you’re a parent then you need to read this article. A 529 plan could be one of the decisions your kids will actually thank you for in the future. With skyrocketing tuition costs, it’s getting harder and harder to pay for college at the time of college.
Very few people know this but the government offers a special savings account called as 529 college savings plan. They are typically offered through your state and vary when it comes to investing options and benefit.
The 529 plan is modeled after a Roth-IRA account in the sense that the money you invest into a 529 plan is post-tax money and grow tax free for the remainder of its life. This means that all the money you place into a 529 plan can grow with the market and you will never pay taxes on those gains. How cool is that?
The only real difference is that a 529 plan has to be used strictly for college related expenses. So, you can’t pull the money out ten years from now and buy yourself a brand new BMW. The government already allows that with a Roth-IRA account, they’re not about to offer a second account!
Benefits of a 529 plan
-Your investments grow tax free and never see Uncle Sam ever again!
-A wide array of investment choices offered through your state.
-Typically, 529 plans offer low management fees.
-Anyone can contribute money to a 529 account.
-Funds can be used at any college across the United States and abroad.
-Easy access through your state’s 529 website.
-High maximum contribution limits (this varies by state).
A benefit for your kids
Now, this article is not promoting for paying for your child’s tuition! In fact, I encourage all parents to have their kids still pay their way through school. My parents made me do it and I’m grateful they did, I learned a ton and gained valuable money management skills. I even graduated college with zero debt!
What I AM saying is that as a parent, you have the ability to use tax free growth to use for future college expenses. You can still have your kids pay you for college tuition; it will just be replacing the 529 funds. You can even lock in tuition rates with pre-paid tuition plans so if your kids do pay you back for tuition, they are paying the price you locked in years in advance.
Opening a 529 plan is truly a win-win decision. You can’t go wrong with investing your money in this type of tax free growth account.
I plan on opening a 529 plan for all of my future children and ensuring they pay the least amount possible for tuition! Although they will be paying their way through school, I can do my due diligence and get them the lowest tuition rates possible while watching my money grow tax free until I pull it out.
So, are you sold? Comment below if you have questions or have a 529 plan and enjoy seeing the money grow tax free!
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Written by Jon the Saver
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Don’t forget about UPromise, which could also help with college costss….
Yes, but remember the average benefits from UPromise is around $47, making it not worth the effort. I’d recommend focusing your efforts on a 529 college savings plan and funneling as much money as you can into that.
We just happened to discuss this on Sunday with soon to be parents. The only bad side I heard was…what if your child gets a full ride to college. What happens to that money? Can you get it out?
That’s a good point and I don’t know! I’ve never heard of full rides unless you have an all star athlete. I’ll take my chances and save in a 529 plan
I have the same question as Lisa, lol, what happens if you don’t need the money for your kid’s education after all? I know you already said you weren’t sure. I am assuming there are some fees or something to withdraw the cash for anything else…
I did some digging, here is the answer via Kiplinger’s: “If one of your children is fortunate enough to win a scholarship, you’d be eligible to take a penalty-free withdrawal from her 529 account up to the amount of the award. You would, however, have to pay federal and state income tax on the earnings portion of the withdrawal. To avoid those taxes, you could name another family member as beneficiary of the plan.”
Great, thanks!!!
Great post…529′s are a great vehicle to save for college education. I’ve got 3 plans on automatic contributions every month. I like have that funding effort completely separate from my retirement effort.
I love the flexibility of a 529 plan. Three plans is baller status, nice work!
My father started a 529 account for me and it has helped me a lot. He also started one for my son when he was born and I plan on contributing to it when I can (still in school). They are great accounts.