529 Plan: Never Too Early to Save for College

By Ryan Crawley

One of the biggest concerns as your child gets older is college. Of course, you are going to have worries about which college your kid is going to attend. But the main concern centers around the ability to pay for college. With expenses rising across the board, it will take a small fortune to pay for four years of college when your child is ready to go.

Lucky for you, there is an education savings plan called a 529 Plan that can greatly assist you in your goal of having money set aside for your child’s college expenses. The plan can provide special tax benefits that an ordinary savings account cannot offer.

There are two basic types of 529 plans. One is a savings plan and the other is a prepaid plan. The savings plan is similar to a 401K or IRA and they will invest your contributions into mutual funds or other investments. The prepaid plan is only available through educational institutions. These colleges and universities will allow you to prepay all or part of your child’s future expenses at their college. However, unless you know for certain which college your kid will be attending when they get older, you probably want to go with the 529 plan that allows you to save and invest for any college or university.

Benefits to a 529 Plan

With the 529 plan, the contributions are not deductible, but the earnings that grow are federally tax-free when the money is taken out to pay for college expenses. For about 30 states, there are also tax benefits as well. Be sure to check if this is the case with your state. It’s always nice to avoid having to pay extra taxes on your own money.

Another key benefit of going with a 529 plan is that the person or persons contributing to it stays in control of it. This means that it does not automatically rollover to your child once they turn 18. Why is that a good thing? This will provide you peace of mind that the money in the account is actually going for college expenses, and not a new car, clothes, new phone, or anything else that a teenager might spend their money on.

The 529 plan is an easy one to keep track of. You can set it up and forget it. Automatic deductions can be taken out of your paycheck and deposited into the 529. There is not a lot of extra paperwork. Just like with a 401K or IRA, check on it frequently to see how the investments are doing.

Contributions to a 529 will not have to be reported on your tax returns. The only time it will have to be reported is when the money is taken out. A single person can contribute up to $14,000 a year to the 529 plan. A married couple can contribute up to $28,000 a year. Both can qualify for the annual gift tax exclusion.

Plus, unlike Roth IRAs and similar programs, there are no income limits, age restraints, or annual contribution limits. Anyone, in any financial bracket, can start investing into the 529 plan for their child. The earlier the better.

Any Penalties for Early Withdrawal?

Just like with most investment accounts, early withdrawals are frowned upon. If you are investing into the 529 plan, but some emergency arises that requires taking out some of the money, you will face a 10% penalty from only the earnings portion of the account. The amount you originally deposited can be removed without acquiring any penalty at all.

There are exceptions to the 10% penalty as well. In the unfortunate circumstance that the beneficiary dies, then there is no penalty. If the beneficiary enters into a Military Academy, there is no penalty either when taking out the money. Also, in the event that your child receives a scholarship and does not need access anymore to the funds to pay for college, you may take out the money without facing the 10% penalty. 

Begin Immediately

This program is one of the best for assisting your child down the road with college expenses. Too many kids leave college with huge amounts of student loans to pay off. If you like having your son or daughter living with you until they are 40, then don’t worry about saving for their college tuition. But if you are like the rest of us and would like them to eventually have a family and life of their own, then start planning now. The 529 Plan is available in all 50 states, but it can differ slightly from state to state. Research your state to find out the specifics that the 529 Plan offers.

———————

Ryan Crawley is a writer and educator from Washington, Illinois. He enjoys using humor in all of his writing. You can find articles by him on several top Education, Parenting, and Fitness sites. To contact him, check out his LinkedIn profile. www.linkedin.com/in/ryan-crawley-b854bb146