Whether your family has started saving for college or not, you may already be aware that 529 plans offer some serious tax benefits. But did you know that families can use these plans to pay for more than just tuition? Or that others can contribute to your child’s plan?
5 Tips Experts Want You to Know about 529 plans.
1. Just do it.
“Families should know that saving for college is always worth it,” says Tim Gorrell, executive director of the Ohio Tuition Trust Authority, which manages Ohio’s CollegeAdvantage 529 plan.
And there’s no such thing as too late. “The earlier the better, but there are advantages to saving at any time,” he stresses. That’s because whatever you’re able to save before college reduces the amount your student has to borrow and pay back (with interest) after graduation.
2. Know the tax breaks.
529 plans offer a couple of terrific tax benefits. First, money invested in these plans grows tax-free, and withdrawals from 529 plans are also tax-free when used to pay for qualifying expenses (see Tip #3). Second, if you invest in your own state’s 529 plan, you may also get a deduction on your state income tax. For example, Ohio residents may deduct up to $4,000 in contributions to the state’s CollegeAdvantage plan per beneficiary, per year.
“This is what distinguishes 529s from other savings that people have,” says Gorrell. “If you invest in a regular mutual fund or savings account, or even a CD, you will pay a tax on your gains when you withdraw your funds. Plus, you won’t be able to deduct any contributions on your Ohio tax return from those kinds of accounts.”
3. Be flexible.
Families can use money saved in 529 plans to pay for tuition, room and board, fees, books, supplies, and even computers and specialized equipment required by a student’s degree program—a stethoscope for nursing school, for example. And they’re not just for expenses at four-year colleges. 529 funds can be used for almost any kind of post-secondary education: community college, certificate programs, trade school, and graduate school. Basically, you can use your 529 plan anywhere your student can use federal financial aid.
529 plans are flexible in another way, too. “If your child doesn’t go to school or gets a scholarship, the beneficiary can easily be changed,” explains Jeffrey Feinstein with Lenox Advisors. So, if one of your children gets a scholarship and no longer needs all the funds in their plan, you can simply transfer the money to another child—or even to yourself for your own education.
4. Do your homework.
Picking a 529 is a lot like picking the investments for your retirement plan. You’ll want to look for plans with low fees, a solid performance record, and top ratings.
“Start with your home state’s plan,” recommends Kathryn Flynn of SavingforCollege.com, which aggregates information on every 529 plan. “More than 30 states offer a tax credit or deduction for 529 contributions.” Just be sure to carefully evaluate the track record of your state’s fund; years of poor performance can undo any tax benefits your state’s fund provides.
That homework should also include figuring out how much you can—and should—save each month. What are your student’s goals? A private college? Public? How much financial aid might they receive? “Sites like SavingforCollege.com offer calculators to help you set a savings goal,” notes Gorrell.
5. Check for ease of use.
Be sure to pick a 529 that makes it easy to contribute. A great way to bolster your child’s college savings is to ask family members to contribute to the fund for holidays, birthdays, and other special occasions. Sure, the latest gizmo or gadget may be more exciting, but an education truly is a gift to last a lifetime.
Ohio’s CollegeAdvantage plan, for example, has a gifting tool where, with a simple code, families can make a contribution with just a few easy steps. Says Gorrell, “My brother gave me his code so that for my nephew’s birthday—or for Christmas—I can use it to make a contribution.”
The bottom line? Don’t wait! “We have $1.4 trillion in student loan debt in our country, and the average loan is $37,000 per student,” says Gorrell. “Anything a family can do now to lower borrowing for college can help.”