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A 529 plan gives consumers a tax-advantaged way to pay for education, and that’s a boon for parents and other family members who want to save for a child’s schooling. A 529 plan offers several other benefits, including the ability to invest with potentially high-return assets such as stock funds, instead of being limited to low-return bank accounts.
Among other things, “these plans can be used as estate planning tools by grandparents to help their grandchildren save for college, or by a family to create a relatively flexible education fund that can span multiple children with proper planning,” says Bill Van Sant, CFP, senior vice president at Girard, a wealth management firm in the Philadelphia area.
Here are seven great benefits of a 529 plan and why this plan could be right for you and your family:
1. Tax-free growth for education
A 529 plan gives you a tax-advantaged way to save for education. You can stash money on an after-tax basis and then grow it tax-free. When you withdraw the money for qualified educational expenses, you won’t pay any taxes on the gains, either. But you’ll have to be careful to use the money exclusively for the items that meet the plan’s rules – otherwise you’ll pay penalties.
The restrictions on distributions are one of the key disadvantages of 529 plans.
2. Potentially high-return investment options
Depending on which plan you choose – each state has its own options – you can invest in stock funds and other market-based investments. That gives you the ability to earn outsize returns on your contributions and the potential to beat the galloping cost of college.
That kind of opportunity, if used correctly, can vastly outstrip saving in a bank account.
3. Potential tax breaks for contributions
If you invest through a 529 plan, you may even be able to get a tax deduction on your state income taxes. Not all states offer a tax break on your contributions, however, and you won’t get a tax benefit in a state where you don’t pay taxes. So, choose carefully.
4. Two 529 plan types
It often gets overlooked, but the 529 plan has a lesser-known option. The two types of 529 plans include:
- An education savings plan that allows you to open an investment account that can be used for future education expenses, including tuition, room and board, books and other costs specifically related to the educational program.
- A prepaid tuition program allows you to buy future college credits at current prices, though they’re available only at participating institutions and are not available for primary and secondary schools.
Consider which plan type works best for your needs.
5. The beneficiary can be changed
A 529 plan gives you a lot of flexibility about who can use the plan and when, says Van Sant.
“Parents can change the beneficiaries on a 529 plan in case the originally designated child chooses not to go to college,” he says.
But you can also use the same 529 plan for multiple children. For example, if your children don’t attend college at the same time, then the beneficiary can be changed after the first child graduates and the plan can be used for the second child. However, it probably makes more sense to simply establish a 529 plan for each child.
You’re under no obligation to close the account once a child graduates or opts out of college.
“529 plans can hold assets indefinitely as long as a living beneficiary is listed,” says Van Sant. “This means that an original beneficiary could change their mind and go back to school later in life, or they could have their own children and name those children as the new beneficiaries of the plan.”
But you could even name yourself as the beneficiary and use the funds if you go back to school.
6. 529 plans aren’t just for college
While 529 plans are generally associated with university education, they can also be used for private primary and secondary schools, too. So, if you’re paying tuition for grades K-12, you can take advantage of a 529 plan, too. The expansion of the program came about as part of the 2017 Tax Cuts and Jobs Act.
The new rules also allow for the use of 529 plan distributions in apprenticeship programs. Apprenticeships are now considered a qualified higher education expense if the apprenticeship is registered and certified with the U.S. Department of Labor.
7. 529 plans can be used to repay student loans
The 529 plan was expanded further in 2019 with the passage of the SECURE Act. Now a 529 plan can be used to pay off up to $10,000 in the beneficiary’s student loans as well as up to an additional $10,000 in student loans for each of the beneficiary’s siblings.
8. A 529 can be rolled over into a Roth IRA
The SECURE Act 2.0 made a big change to how a 529 plan can be used, and it’s especially relevant for those who are afraid to contribute too much lest they be unable to use the money. Starting in 2024, a 529 plan can be rolled over into a Roth IRA for the account’s beneficiary.
But there are some important details, too. The account must have been opened for at least 15 years, and the rollover is limited to the maximum annual Roth contribution. Rollovers are capped at a $35,000 lifetime maximum. The full details of the plan are still being worked out for the rollout in 2024. But it’s even more reason to open a 529 plan sooner rather than later.
9. Anyone can contribute to a child’s 529 plan
While parents are the most likely to contribute to a child’s 529 plan, other family members can legally contribute to the plan, too. That includes close relatives such as grandparents, aunts and uncles as well as those less closely related. In fact, anyone can contribute to a 529 plan and name the child as a beneficiary, either through your own plan or that owned by someone else.
How to get started with a 529 plan
It can be easy to open a 529 plan, and you can start a 529 directly through a specific state’s plan or through a broker. You can start a plan with any state, but before you open one, you’ll need to do some research.
“Before choosing a 529, investors will want to evaluate a 529’s investment options to see how these investments have performed,” says Van Sant.
Be sure to look at what investment options are available and how much they cost. Good investment options allow you to maximize your potential return and minimize your costs.
“Additionally, investors will need to compare and contrast investing in their own state’s 529 plan versus investing in another state’s 529, as there are typically tax advantages associated with investing in one’s home state 529,” says Van Sant.
“Once you determine which 529 is best for you, setup and funding is rather seamless,” says Van Sant.
A 529 plan is a great ally in saving up enough to pay for the rising cost of college, but an even bigger ally is time, because it allows you to compound your gains. Combine the two by starting a 529 plan today and you can roll up a nice bundle when it comes time to go to school.