529 Plans for College Savings

529 Plans What you need to know

A 529 plan is an account specifically designed to assist individuals to save money for qualified higher education. Upon opening an account and funding with one-time, and/or, ongoing contributions, the account balance builds over time. The account is commonly invested in a mixture of mutual funds or ETFs (Exchange Traded Funds). The account grows tax-free, so you don’t pay taxes each year on the capital gains or dividends within the account. Upon needing to pay tuition bills for qualified higher education, the account can be withdrawn free of taxation. 529 plan’s are important to offer individuals and families as a way to help pay for higher education.

Advantages of 529 plans include the state tax deduction received for contributions, the tax free growth of the account, and the tax free withdrawals when used for qualified higher educational spending.

Disadvantages include market risk, for the account to grow it needs to be invested, and how you invest can vary based on risk tolerance. Another disadvantage is that if you do not use the account for qualified expenses. The growth portion of the account is taxable and there is a penalty tax upon withdrawing.

The ideal situation is to open an account when the beneficiary (your child in most cases) is born, that will allow approximately 17-19 years of account contributions and growth within the account to maximize before needing the funds for higher education. The ideal amount to save depends on the individual or parents opening up the account. This amount should be discussed with your financial advisor. 529 account contribution limits vary by state, for example in Colorado, the account can receive contributions up until the account value reaches $400,000. The contribution amount will vary based on the desired education, public vs private university, or trade school. 529’s also allow others to make contributions to the account. For example, grandma and grandpa can make gift contributions to the account on behalf of your child. Some of my clients encourage 529 monetary gifts over toys for birthday presents! And if you have more than one child, and the account is not used by the first child, the account can be “turned over” to the next child to use the funds for qualified higher education expenses.

Click here if you would like to learn more about your college savings options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.