The 529 Plan, named for Section 529 in the US Internal Revenue Code, has become an exceedingly popular vehicle for parents and grandparents who want to fund future educational expenses for the next generation. And with the expanded definition of “qualified educational expenses” included in the Tax Cuts and Jobs Act (TCJA) of 2017, it became possible to pay up to $10,000 of tuition and fees for private elementary and secondary schools, in addition to the traditional goal of using the plans to cover college expenses.
Unlike traditional IRAs or 401(k)s, 529 Plans do not provide a federal income tax deduction for contributions. However, they do provide the same tax-free compounding and growth, making them a powerful tool for accumulating a war chest to defray the ever-rising costs of higher education. Each state has its own versions of the 529 Plan, but you are not required to use your state’s plan, nor is your child required to enroll at an in-state college, though some states offer extra incentives, such as state income tax deductions for contributions or waivers of certain fees if the plan is used to cover in-state college costs. To see a list of available plans for your state, visit savingforcollege.com and click on the interactive map outline of your state.
Here are some useful tips for getting the most out of your 529 Plan.
1. Start early. As with any compounding or growth-oriented investment, the more years you can allow it to build, the bigger your balance will be.
2. Put your contributions on autopilot. The less you have to think about making contributions to your plan, the more likely you are to make systematic deposits. Many plans allow payroll deductions or links to checking accounts. If your situation changes, you can always revise your arrangements.
3. Compare fees. All plans’ fee structures are not created equal. Savingforcollege.com provides quick links you can use to compare plan ratings, fees, and performance characteristics.
4. Re-invest state and federal tax refunds. Thirty-four states and the District of Columbia offer state income tax deductions or credits for 529 Plan contributions. Seven states allow a deduction even if you don’t use their plan. Over the years, if you consistently re-invest these savings, it makes a big difference.
5. Reinvest credit card rewards. Use a credit card, pay off your balance every month, and periodically invest your accumulated reward balance in your 529 Plan.
6. Deposit gifts. Got a grandparent, aunt, or uncle asking what to give your child for a birthday? A deposit to a 529 Plan is a gift that will give back for years to come. Some plans even offer an online gifting platform to encourage gifts to a child’s 529 Plan.
7. Include your 529 Plan in your budget. As your life circumstances change, so can your planned deposits. When your child grows out of diapers, that frees up an extra $70–80 per month; that’s an extra $840–960 per year that can start growing, tax-free.
8. Own stocks. Especially for younger children with five or more years before entering college, owning a high-quality equity mutual fund or ETF will usually provide maximum growth. Some plans offer an age-based strategy that automatically shifts holdings from stocks toward more conservative and liquid assets as the time for college nears. But shifting out of stocks too early could cost you significant growth.
I work closely with informed investors, thriving retirees, family stewards, and others who are interested in providing for the educational needs of children and grandchildren. If you would like to learn more about how a 529 Plan could fit into your financial strategy, please contact Empyrion Wealth Management to set up an appointment. And to learn more about handing down positive financial attitudes to the next generation, you can read my article, “Pass It On: Gifting a Roth IRA to a Child or Grandchild” by clicking here.
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