By: Keri Danielski
As you dream of your child’s future, you might have this question looming over your head: How am I going to pay for my child’s college education? As parents, we know that the earlier you start a college fund for your kids, the better.
If you’re not sure what other ways you can financially prepare for the coming college years, a good place to start is a 529 college savings plan. These savings plans are designed specifically to help pay for college and are a great investment option for families who want to see their money grow, tax-free, over a stretch of time.
Here are answers to common questions around 529 plans so you can be fully equipped to start saving for your little one’s bright future:
What is a 529 savings plan?
A 529 is a state-sponsored college savings plan that allows parents to invest money towards educational expenses. The 529 is beneficial for many reasons, but most importantly, the savings plan is tax-free. Once the beneficiary of the account is college-bound, they’re able to withdraw funds free of federal and state income taxes.
By the time college rolls around, the recipient can use the money towards a variety of schooling necessities, such as:
- Laptops and related technology devices
- Room and board
Additionally, as of January 1, 2018, families can now also use their 529 plans to pay for private elementary, middle and high school tuition.
What kind of 529 plan should I get?
There are two types of 529 plans:
- College savings plans: This is the more popular of the two 529 plans. The plan works by establishing a savings account specific to schooling expenses. Contributions are invested, tax-free until the beneficiary is ready for college.
- Prepaid tuition plans: The prepaid tuition plan allows parents to pre-purchase all or part of tuition costs for an in-state, public school. The investment can then transfer to one of the 250 private or out-of-state colleges sponsored by the plan. This plan is great for locking in current tuition rates, but make sure to consider all the terms, as some schools come with high premiums and are not always guaranteed to be covered.
How do I contribute money to my child’s 529 plan?
There are two approaches to contributing to a 529 account:
- Static funds: Static funds include stocks, bonds, real estate funds or money market accounts. This is a customized plan that tends to be more appealing to investment-savvy folks.
- Dynamic investment: Dynamic investments are based on the beneficiary’s age, which starts off by investing in stocks and higher-risk options. As the child ages, the investment automatically shifts to a steadier, low-risk option. This approach is better for those who prefer a hands-off approach towards investing.
Where should I open my 529 college savings plan?
Although every state offers at least one 529 plan, their investment options and fees look a little different.
You can invest in any state’s 529 plan, even if you don’t live there or your child won’t go to school there. With that said, some states offer tax deductions based off of 529 contributions, so it’s worth shopping around to see what plan works best for your current situation.
Starting a 529 college savings plan requires some time and research and before you dive in, it’s important to know where you stand. With tools like Intuit’s Turbo, you can gain a holistic view of your financial profile and see your income, credit and loan details in a single account dashboard.
Will this impact my child’s ability to file for financial aid?
Financial aid takes family income and additional assets into account, but when a student applies for Federal Student Aid, there’s a section of the application dedicated to Expected Family Contribution, where the student will note family income and assets, such as the 529 plan.
Fortunately, a 529 is weighed far less than other areas of wealth, which means that it will not greatly impact a student’s eligibility for financial aid nearly as much as if the child comes from a wealthy family.
When it’s time for college, how does my child access their 529?
Assuming that the 529 plan was open in the parent’s name, you would allocate the funds in its totality or on an as-needed basis, on behalf of the recipient. Parents can also transfer the account into the beneficiary’s name, when their child is prepared to take on that responsibility. This is also a great time for parents to have the real money talk with their child as they head off to school, so they understand what these funds are used for.
Is my 529 plan tax deductible?
When it’s tax time and you’re getting ready to file all you’ll have to do is answer a few simple questions about your education tax benefits associated with your 529, and you’ll be eligible for relevant deductions. If you run into any jams during this process, you can connect with a tax pro or CPA to answer your questions.