Mastering the 529 Plan

college-savings

This past year, I decided to open a 529 college savings plan for my future children. For those who know me, you know I don’t actually have children, but I hope to someday. Getting a head start on paying for growing college costs seemed like a good idea.

If used for “qualified education expenses,” like tuition and room and board, withdrawals from a Section 529 Plan are free of federal taxes and in many cases state taxes. For example, if I funded an account with $10,000 and that account grew to $20,000, I could take out the whole $20,000 free of any taxes. By comparison, if I had put $10,000 into a normal investment account and withdrawn $20,000, I would pay taxes on the $10,000 worth of growth, potentially costing thousands of dollars.

A 529 plan may not be for everyone, and the plans also vary by state. But if you and your advisor think that one of these plans could help you meet your goals, here are some ways to get the most out of them.

Fund It Early and Often

The greatest benefit of a 529 plan is the tax-free growth, so the sooner you fund a plan, the better. Funding the plan for a newborn gives you 17-plus years to let the money grow, allowing you to invest aggressively early on and realize the greatest growth and tax benefit. By funding the plan often through automatic contributions, you can buy when markets are both up and down, allowing you to dollar-cost average.

Risk Adjust as Your Child Grows

No one wants to have their college savings account drop in value by 40% right as their child is starting college. To avoid this, many plans offer an “age based” option that makes investment options more conservative as your child approaches college age. This can be a great option to “set it and forget it” so that the money is there when you need it.

Consider Other Beneficiaries

I was able to open a 529 plan in my name, which shows one of the great features of the plan—you can change the beneficiary to someone else in your family (other kids, nieces, cousins or even yourself) at any point. If there are other people whom you could see needing the money if your intended beneficiary does not need it (say, if your child gets a scholarship), then you can make sure that your contributions will go to good use.

Don’t Be Afraid to Take Care of Yourself

Finances can change, and at Abacus, we never believe that college savings should be at the expense of our client’s own retirement. So, if you end up needing some of the money from your 529 plan, you can always take it back for a small penalty (10% plus taxes, but only on the investment growth of the account).

Massive student loan debt coupled with steep interest rates has left many college graduates in a tough position, forcing them to put off milestones like starting a business, having children or buying a house. Families can help lessen the burden for the next generation by pre-funding college costs through a Section 529 plan while taking advantage of some great tax breaks along the way. Talk to your Abacus advisor to see if a 529 plan will work for you.

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