Saving for college can be a daunting task. But the alternative, waiting until the kids reach college age and paying tuition out of current earnings, can result in diverting funds that should be used for retirement savings to pay for higher education costs. 529 offer many benefits over traditional savings methods, and here are just a few reasons why they make sense in many situations.
- Tax benefits: Earnings on investments in a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Some states also offer tax deductions or credits for contributions to 529 plans.
- Flexibility: 529 plans can be used for qualified education expenses at any eligible institution, including colleges, universities, trade schools, and some international schools. They can also be used to cover expenses beyond tuition, such as books, supplies, and room and board.
- Control: The account owner maintains control over the account and can change the beneficiary or use the funds for their own education if necessary.
- High contribution limits: Many 529 plans have high contribution limits, sometimes over $300,000 per beneficiary, allowing for significant savings potential.
- Estate planning benefits: Contributions to a 529 plan can be considered a gift and may be subject to gift tax rules, but there are ways to contribute larger sums at once and take advantage of the annual gift tax exclusion. Additionally, assets in a 529 plan are generally not included in the account owner's estate for estate tax purposes.
As with any savings strategy, there is no one-size-fits-all, but there is little downside to using a 529 platform, especially since now account owners can roll excess funds into a Roth IRA for their future benefit, courtesy of Secure Act 2.0. Unused 529 Plan savings can also be withdrawn by the owner (for themselves or to pay for non-qualified expenses), but are subject to a 10% penalty and income tax on the growth of the principal invested.