Worried about your child’s college fund? A 529 plan is an effective way to save money for their future education.
It’s a state-sponsored plan that allows you to use your after-tax contributions to increase earnings on a tax-deferred basis. Plan holders can withdraw the funds they accumulated to pay for qualified educational expenses like tuition, other school fees, and textbooks tax-free.
You can actually join a plan from any state, but the benefits and tax breaks may be different for residents. Those with a 529 plan can open an account to invest in assets like stocks. It’s said to be the best way to save for educations. However, it’s also somewhat underused. Here are 7 tips on how to make the most out of your 529 Plan.
Start Early
Starting your plan early allows you to take more chances and risks when it comes to investing in stocks.
The earlier the account is established, the more risk it can take; therefore, maximizing the tax-free growth. The extra time also allows aggressive investment. Longer-term returns are higher compared to the more volatile shorter-term ones.
Extended Family
Although it’s the parents who have the primary burden of paying for their child’s college education, extended family members can actually help with the contributions or open one for them.
Regardless of relation to the beneficiary, the extended family members who contribute to the plan can get deductions on their state’s taxes—but only if it’s offered by the state. For most U.S. states, the contributor doesn’t need to be the owner of the plan to claim the deduction.
Follow the Rules
As mentioned earlier in the article, the money in the 529 plan can be withdrawn to pay for qualified education expenses without having to settle taxes—emphasis on qualified. If the plan holder withdraws more than the allowed limit, they can be slapped with a penalty or tax.
Owners should also make sure not to get more than the actual amount of expenses for a given year, or else face penalties.
Make Direct Payments
One way to avoid erroneously withdrawing money that’s more than the actual expense is to have the 529 plan pay the school directly. Aside from it being a hassle-free option, you can also avoid having to face a tax liability.
Know Your State’s 529 Rules
Each state has its own plans and, therefore, have their own set of rules. Before you decide on where to get your 529 plan, find out and consider the pros and cons of every state.
Each state may vary on things like how they give tax breaks, maximum account balance, and if they only offer these benefits if it’s your home state. Don’t forget to claim the state income tax deduction, too!
Take Advantage of Additional Tax Benefits
To further maximize the 529 plan, use it along with other tax benefits. However, be mindful of the rules and requirements of each benefit and plan carefully.
Not Tied to One Child
If in case your child decides to not go to college, the fund in your 529 plan won’t go to waste. You can actually transfer it to another beneficiary—may it be another child, a grandchild, a niece, a nephew, or another relative.
If you can’t change the designation, you have to withdraw the money and pay a penalty along with income tax on earnings. A good thing is that it can also be used for education expenses for private elementary and high school.