College Savings: 529 Plans
Kids are expensive and education can be ridiculously expensive. With a 529 Plan, you can start chipping away at that future expense with a smart savings plan.
College Savings: 529 Plans1/3/2018
What is a 529 Plan?
A 529 Plan is a state-operated program that helps families save money for future educational expenses.
How does it work?
You contribute your after-tax dollars to a professionally managed investment account. That money grows for years and years until you send your (hopefully grateful) kid to college. At that point, all withdrawals used for eligible expenses are tax-free. Per the 2017 Tax Cuts and Jobs Act, eligible expenses include college expenses as well as public, private or religious elementary or secondary school expenses. As an added bonus, you will likely qualify for a tax deduction or tax credit in each year you contribute to the 529 (amounts vary by state).
The earlier you start, the better. Consider a family who starts putting $100 per month into a 529 plan. If they earn 6% on their investments over 18 years, the account would grow to nearly $40,000.
There are state-specific contribution limits, which apply to the total value of all contributions within each 529 Plan. Most state limits are between $300,000 and $500,000. Also, note that annual contributions in excess of $14,000 per individual ($28,000 per married couple) may result in paying a gift tax.
Additional benefits include:
Reducing College Student Loan Debt
· According to studenloanhero.com, the average student loan debt for the class of 2016 graduates is $37,172 – up 6% from the prior year.
· Ever-rising college costs means the average burden will likely increase.
Lowering Your Tax Bill
· Investment earnings are not subject to federal tax, and generally not subject to state tax when used for qualified education expenses.
· Many states offer significant state tax deductions on contributions.