College savings plans are becoming more popular as the cost of qualified higher education continues to rise. The most popular of the college savings options is the 529 account or just “529”. A 529 is an account to assist individuals to save money for qualified higher education.
So how does it work? Upon opening an account and funding with one-time, and/or, ongoing contributions, the account balance builds over time. The account is invested in growth oriented assets, such as mutual funds and 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 Upon needing to pay tuition bills for qualified higher education, the account can be withdrawn free of taxation.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’s are important to offer individuals and families as a way to help pay for qualified higher education. Advantages of 529 plans include the state tax deduction received for contributions (this does vary by state so check with your tax advisor), the tax free growth of the account, and the tax free withdrawals when used for qualified higher educational spending. Disadvantages include market risk, however, for the account to grow above and beyond the contributions made, the money needs to be invested. The investment approach utilized varies 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.
College 529 Plan, Saving for Higher Education
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. Discuss this amount 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! In addition, families with more than one child, the account balance can be re-assigned to the next child.
If you have questions about college savings and want to know the options available to you, click here to schedule a call.
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