With the average price of a private four-year college in the United States (including tuition, fees, and room and board) rising to nearly $45,370 a year,¹ many people are concerned about how to fund their child's education. Fortunately there is one possible solution to the college savings conundrum, and it's called the 529 plan. The following are just some of the key benefits of the 529 plan.
The tax benefits
Since it was created in 1996, the 529 college savings plan has become one of the most popular college savings vehicles today - and with good reason. A 529 plan offers federal and, in some cases, state tax advantages and provides tax-deferred growth. So for example, as long as you keep your money invested in a 529 plan, you won't have to pay taxes on your investment gains. And when you're ready to withdraw your money to pay for college expenses, your withdrawal will be tax-free. Even better, you won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
Limited effect on financial aid
Because a 529 plan's assets are considered parental assets, a 529 will have a less negative impact on a student's financial aid award than money kept in other types of checking and/or savings accounts. For example, the Department of Education reports that for every dollar held in a 529 account in a parent's name, up to 5.6 cents will be subtracted from the family's federal need-based financial aid package. That's considerably less than the 20 percent rate on funds held in checking and savings accounts that are held in a child's name.
It's low maintenance
Starting and maintaining a 529 savings plan isn't complicated. Once you decide which 529 plan you want to use (Saving Plan or Prepaid Tuition plan), you simply complete an enrollment form and begin making your contributions. The ongoing investment of your account is handled by the plan, and assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager.
With a 529 plan, there are generally no income limitations or age restrictions. Therefore, everyone is eligible to take advantage of a 529 plan-not just your kids. So if you've been thinking about going back to college or graduate school in the future, a 529 could be a great option for yourself.
NOTE: As of 2018, the IRS has amended the term “qualified higher education expense” to include a limited amount of annual expenses from a 529 Plan for tuition at an elementary or secondary public, private, or religious school. Source: www.irs.gov/newsroom/529-plans-questions-and-answers.
1. College Board, “Trends in Higher Education,” 2016-2017