After welcoming our daughter into the world almost a year ago we have been looking into things we can do to set her up financially. In addition to improving our own financial wellness, we plan to do things to help her in the future. That brought us to researching 529 savings plans and their benefits. I wanted to bring what I learned to the blog.
What is a 529 Plan?
According to SavingForCollege.com, a 529 plan is an investment account that provides tax benefits to the accountholder when used for qualified education expenses. Now, what are qualified education expenses, you ask? The include the following:
- College tuition
- K-12 tuition
- Apprenticeship programs
- Student loan repayments
Types of 529 Plans
Every state in the U.S. offers some kind of 529 savings plan except for Wyoming. These types of savings plans are typically categorized as a college savings plan or a prepaid tuition.
A prepaid tuition plan allows you to pre-pay all or part of the costs of education at an in-state public institution. These plans can be converted to be used at private colleges or out-of-state universities as well. For individuals interested in private college education, there is a separate prepaid tuition plan called the Private College 529 Plan.
College savings plans, on the other hand, work like a 401(k) or IRA. It puts your contributions into mutual funds and other similar investments. Before opening this kind of account it is a good idea to take a look at how each 529 savings plan investments are performing.
Benefits of a 529 Savings Plan
There are a few clear benefits of having a 529 savings plan. First, having a 529 savings account does not impact your eligibility for financial aid. So, even with that money set aside, the student can apply for grants and other aid. The money in the 529 won’t be taken into consideration.
Another one of the benefits that draws most people in is the tax breaks you receive for having this type of account. The money grows on a tax-deferred basis and you don’t have to pay taxes on the money when it is withdrawn if it is being used for a qualified education expense. Depending on where you live, you can also get additional deductions and credits for contributions made to your 529 savings plan.
Education savings plans also have generally low contribution amounts. Once you have deposited the initial required amount of money, the upkeep on the account can be as low as $25 per month. You simply need to find the right 529 plan for you.
Cons of 529 Plans
One of the only cons I can see is that your 529 savings plan is an investment account. When the market is performing poorly, so is your child’s education fund. During the economic chaos of 2008, my grandfather lost much of my college tuition money in the stock market. So, I do have that lingering in the back of my mind as we make our decision about moving forward with a 529 plan.
At the end of the day, we’d like to either homeschool or send our daughter to private school. Public school in our area just isn’t what it used to be. Knowing that we could stash away money for her K-12 tuition at a private school with some tax benefits is great. Additionally, if we decide to homeschool, we can put money into the account for college or whatever she decides to do after high school.
Readers, do you have experience with this kind of account? What are your thoughts about 529 savings plans?
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Amanda Blankenship is the Director of Social Media for District Media. In addition to her duties handling everything social media, she frequently writes for a handful of blogs and loves to share her own personal finance story with others. When she isn’t typing away at her desk, she enjoys spending time with her daughter, husband, and dog. During her free time, you’re likely to find her with her nose in a book, hiking, or playing RPG video games.
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