A 529 plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified educational expenses. This generally applies to college expenses such as tuition, books, and other fees, though it can also be used for K-12 school tuition.
The ability to provide family or friends the assurance that their generous gift will go into an account specifically for a college education is the most significant benefit of a 529, in my opinion. It shows that you are serious about saving for your child’s education. It also reassures that you aren’t planning to take that money and spend it on something different.
Most 529 plans also allow for direct deposit payroll deductions from your employer. As a result, we put $50 every paycheck into each of our kids’ college funds. While this doesn’t seem like much and likely won’t cover their college expenses, even these small contributions can add up to big dollars over time.
The nuances between the tax benefits of 529 plans can get complicated. Be sure to have a conversation with an accredited financial advisor or do your research to find out which will provide the most benefit to you—several factors to consider, such as the tax benefits and investment options fees.
When you put your money into a 529 account, you can rest assured that money will not be taxed when you withdraw for qualified education-related expenses. This is a significant benefit as the growth in earnings can add up by the time you’re ready to ship your kid off to college.
There are several options if your child ends up not going to college or ends up with a scholarship. For example, you can quickly transfer money between children, you can use the funds for private K-12 tuition and other certifications, and you can even use the funds for your education expenses. So while there is some risk in getting hit with a 10% penalty, that is a worst-case situation that doesn’t come to fruition all that often given other potential options.