As the cost of college tuition continues to rise, it’s more important than ever for parents to start saving for their child’s education as early as possible. One of the most effective ways to do this is by opening a 529 account.
A 529 account, also referred to as a 529 plan or Qualified Tuition Program, is a tax-advantaged savings plan designed to encourage saving for future education costs.
They are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
While 529 plans are commonly used for higher education expenses, they can also be used for K-12 tuition in many states.
This flexibility can be a game-changer for families planning on private or out-of-district schools for their children, adding another layer of appeal to these accounts.
Contributions to a 529 account grow tax-free, and withdrawals are also tax-free as long as they’re used for qualified education expenses. These can include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution.
One often overlooked advantage of a 529 account is the control it offers.
The account owner, not the beneficiary, retains control of the funds.
This means that if your child decides not to go to college, you can change the beneficiary to another family member, including yourself, if you’d like to take some courses.
The gift tax advantage of a 529 account is another area worth mentioning. Currently, gifts of up to $15,000 per person per year are excluded from the federal gift tax. However, with a 529 plan, you can make a lump-sum contribution of up to $75,000 ($150,000 for married couples) and avoid federal gift tax, provided you make an election to spread the gift evenly over five years.
It’s also crucial to note that not all 529 plans are created equal. Each state sponsors at least one 529 plan, but the specific features and benefits can vary widely.
Some states offer a state income tax deduction or credit for contributions made to the state’s 529 plan, but others do not.
Always research your state’s specific plan before making a decision.
Finally, while there’s no denying the numerous benefits of 529 plans, they’re not the only option for saving for your child’s education. Coverdell Education Savings Accounts (ESAs), UGMA/UTMA accounts, and even Roth IRAs can also be used for education savings. It’s always a good idea to consult with a financial advisor or tax professional to weigh your options before making a decision.
Remember, the earlier you start saving for your child’s education, the better. Even small contributions to a 529 plan can add up over time, helping to ease the financial stress of college tuition when the time comes. So whether your child is a newborn or heading into high school, it’s never too late to consider starting a 529 account.