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Is a 529 Education Savings Plan Right for You?

Is a 529 Education Savings Plan Right for You?

August 15, 2023

It’s back-to-school season, and no matter what stage of life a child is in, any parent or caregiver will likely agree that time with kids moves too quickly. The adage, “The days are long, but the years are short,” is certainly true – and that becomes especially clear when it’s time to pay tuition. 

As with all financial planning strategies, the most important piece of advice I offer to parents is start saving and investing early. A state-sponsored 529 plan can be a powerful vehicle to save for future education expenses. Here are a few of the advantages:

  1. Tax-Deferred Growth and Tax-Free Withdrawals: Funds grow tax-deferred, and withdrawals are tax-free when used for qualifying expenses. This sets 529s apart from typical savings accounts.

    Qualifying expenses are broad, too. They include tuition to universities or vocational schools, room and board, books, and other education expenses. Up to $10,000 can also be used for qualifying K-12 expenses. It's important to note that these tax benefits are broadly available federally, but most states also offer tax advantages to their residents.

  2. State Tax Deductions or Credits: In addition to federal benefits, more than 30 states offer state income tax deductions or credits for these contributions. This can help increase the net return on your investment.

  3. Variety of Plan Options: If there are advantages for investing in your home state’s plan, you should consider it. However, if your state’s plan isn’t optimal, you can choose any state's 529 plan.

  4. Flexibility: You can change the beneficiary of the 529 plan to another qualifying family member without tax penalties. So, you can set up accounts for multiple beneficiaries and if one doesn’t use the funds, they can be transferred to another with some paperwork.

    Qualifying family members can even extend beyond sons and daughters to grandchildren, nieces, nephews, or yourself. This is an excellent option for extended families or adults with future higher education goals.

    Funds can also be used to repay up to $10,000 in student loans.

  5. Peace of Mind for Unused Funds: A new rule going into effect on January 1, 2024, helps you rest easy knowing that you won’t lose money if your account is over-funded or if your child doesn’t need the 529 account after all. In this situation, you’ll be allowed to roll funds to a beneficiary’s Roth IRA without penalty.

    Just keep in mind that your 529 must have been open for at least 15 years and changing beneficiaries could restart the 15-year clock. Also, these fund transfers can’t exceed the 2024 ROTH IRA limits ($6,500 with an extra $1,000 if you’re over 50 and a lifetime limit of $35,000).

  6. High Contribution Limits: 529 plans aren’t capped by the IRS. States set their limits, with most ranging between $235,000 and $529,000 per beneficiary. This makes them an excellent choice for families who want to save significant amounts for their children's education. 

If you're looking to save for future educational expenses, this type of plan can provide excellent benefits – from tax advantages to flexibility in giving.

Balancing saving a child's education with your daily cash flow needs, retirement and emergency funds is essential. Even if you start saving small amounts now, being consistent over time may show significant results, thanks to the impact of compounding interest.

Contact us to learn how Wealthspring Financial Partners can work with you on a holistic approach to tax-smart financial planning, where education savings form a key part of the bigger picture.