Saving for your kid’s education is a huge goal, and it can feel overwhelming with all the options out there. One of the best tools to help you out is a 529 plan. If you’re just getting started with finances or thinking about your child’s future, this beginner’s guide to 529 plans is perfect for you! So, let’s dive into what a 529 plan is, why it’s awesome, and how you can make the most of it for your little one(s).
What is a 529 Plan?
A 529 plan is a great way to save for future education costs without paying extra taxes. States or schools set up these plans to let you save for things like tuition, books, and other school expenses.
When you put money into a 529 plan, it’s invested in stocks, bonds, and mutual funds. The best part? Any earnings from these investments are tax-free if you use them for college-related expenses.
Over 20 years, the average rate of return is about 9%, which means you get tax-free growth of 9%! Not too shabby!
What are the Benefits of a 529 Plan?
1) Tax Advantages
One of the best features of a 529 plan is its tax benefits. The earnings in your 529 are federal tax-free if you use them for qualified education expenses. Some states also offer tax deductions or credits for contributions to a 529 plan, providing additional savings.
2) Flexibility
When you think of college expenses, odds are you think of tuition at a four-year university. However, A 529 plan isn’t just for traditional college expenses. These funds can also be used for K-12 private school tuition, vocational schools (culinary or design school, for example), and even some international schools.
A 529 can also cover textbooks, room and board, and computers. So, even if your kiddo opts not to attend a four-year university, these funds can still cover many different expenses. Last but not least, new legislation just passed allowing you to roll up to $35,000 from a 529 into a Roth IRA in your kiddo’s name (exciting!).
3) Control
As the account owner, you maintain control over the funds in the 529 plan. You decide when and how the money is spent, and you can change the beneficiary to another family member if the original beneficiary doesn’t need the funds.
How to Open a 529
Opening a 529 plan may seem daunting, but it’s easier than you think. Here’s a step-by-step guide to get you started:
- Choose the Right Plan: Each state offers its own 529 plan, and you’re not limited to your home state’s plan. This means you could live in California but choose to pay into Oregon’s 529 plan. This is a great site for comparing different plans based on fees, investment options, and tax benefits to find the one that suits your needs.
- Enroll: Once you’ve selected a plan, enrolling is straightforward. Most plans offer an online enrollment process where you’ll provide your personal information and choose your initial investment options.
- Fund: You can fund your 529 plan with a lump sum or set up automatic contributions. I have money automatically sent to my boys’ 529 funds on the 1st of every month. Another great option is to ask grandparents or family members to add funds instead of birthday gifts (your kids will be thrilled – lol).
Understanding Your Investment Options
Typically, 529 plans offer a range of investment options, including age-based portfolios that automatically adjust as your child gets closer to college age. Here are some common choices:
- Age-Based Portfolios: These adjust the asset allocation from aggressive to conservative as your kiddo approaches college age.
- Static Portfolios: These maintain a fixed allocation of stocks, bonds, and other assets.
- Individual Fund Portfolios: You select specific mutual funds or other investments.
Common Misconceptions About 529 Plans
- “I can only use the funds for a four-year school.” As mentioned earlier, 529 funds can be used for a variety of educational expenses, including K-12 tuition and vocational schools (like culinary or design school).
- “I’ll lose the money if my kid doesn’t go to college.” Thanks to new legislation, you can change the beneficiary to another family member or even roll over unused funds into a Roth IRA.
- “It’s too late to start saving.” Yes, it’s best to start early. However, it’s never too late to begin! Even if your kiddo is closer to college age, a 529 plan can still offer significant tax benefits and savings.
Beginner’s Guide Tips for Maximizing your 529
- Start Early: The earlier you start saving, the more time your money has to grow. Thanks to compound interest, even small contributions can add up over time.
- Contribute Regularly: Consistency is key. Setting up automatic monthly contributions ensures that you’re steadily building your savings without having to think about it.
TL;DR
A 529 plan is a powerful tool for saving and planning your child’s educational future. These plans offer tax benefits, flexibility, and control. If you’re unsure where to begin, you can follow this step-by-step 529 beginner’s guide to get funding. It’s just one more step on your path toward achieving financial literacy!
