WHILE 529 COLLEGE savings plans have drawbacks, they have emerged as perhaps the best choice for parents looking to sock away money for college. A new, added benefit: Thanks to the 2017 tax law, up to $10,000 can be withdrawn from these accounts each year to pay for education costs for kindergarten through 12th grade.
The plans, named 529 after the relevant section of the federal tax code, allow you to save huge sums every year. Moreover, you can contribute no matter how high your income. Your savings grow tax-free as long as the money is used for qualified education expenses. Many states even offer state tax deductions or credits for contributing.
For college-financial aid purposes, the plans are typically considered a parental asset, which means their impact on aid eligibility is far less than if they were deemed the student’s asset. If you don’t use all the money for one child’s education, you can change beneficiaries and use the account to help another child. To learn more, go to SavingforCollege.com.
For well-heeled parents, 529 plans can be especially attractive. In 2019 and 2020, you can’t give another person more than $15,000 without worrying about the federal gift tax. But with a 529 plan, both parents could contribute five times that sum, or $75,000 each, and count it as their gift for the next five years. That gets the money growing tax-free more quickly, which potentially is a significant benefit. This might also be a smart strategy for wealthy grandparents.
What about the drawbacks? Some plans have high expenses, but you can sidestep that problem by favoring lower-cost plans. You can change your investment selection just twice a year, which means 529 plans aren’t good for those inclined to trade. Finally, if you don’t use the money for education and instead simply withdraw it, you’ll face income taxes and possibly tax penalties on the tax-deferred growth.
Next: Grandparents and 529s
Previous: Investment Strategy