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529 College Savings Plans 101 for 2023

As schools are winding down for summer, lots of students are either ready to enjoy the summer, or eager to start working, in the case of recent college grads. Preparing a child for college is a journey and one that requires LOTS of resources. In either case, college is the one thing parents and students stress about, in terms of the costs. The 529 plan is one savings vehicle that can allow families to save for college with tax benefits to help pay for higher education. In this post, I will talk about why this is a good option for those that want to support higher education, the availability of the plans and the tax advantages.

In terms of availability, 529 plans are available in all states within the United States. There are different options such as prepaid plans and traditional 529 savings plans. Depending on the state, there could be additional tax benefits at the state level or state specific state run 529 plans. The latter, in my opinion, is somewhat of a bummer, but you should know and understand the rules.

In terms of availability, to start a 529 plan there is no account minimum requirement and no income limit for participation. The funds can be used at most eligible community colleges, public and private universities, or vocational and technical schools across the country. The funds can be used for undergraduate or graduate programs. The person who opens the account can maintain control of things like the timing and amounts of withdrawals. They can change the beneficiary to another family member of the same family. So, if the child it’s intended for is not the sharpest tool in the shed, it won’t go to waste. Also, the same beneficiary could be an ace and get a full ride. Having control allows for flexibility and to ensure the best use of the 529 plan.

Let's talk about tax deferral! The power of a 529 plan is tax-free growth. Tax-free growth can have a positive impact on the money you are saving for a child’s future education versus taxable accounts. Without tax deferred growth, the money you are saving for the future is taxed every year on gains when reinvested, or at the time the investment is liquidated. If the investment pays dividends or interest, that's taxed as well. You can reference the image below to see an example of a $7,500 initial investment with $100 monthly contributions. The tax-deferred account makes lots of sense and is a better source to help fund a child’s college education.

While there is no restriction on when someone can start saving, you need time on your side to accumulate enough money to help cover the cost of a college education. Time is important due to the rate of tuition increases which is an important factor to consider. The cost of higher education is generally rising at a higher rate than inflation. Education Data has the average college tuition inflation average at 4.63 annually during the 2010-2020 time period.

The account owner can be the parents, grandparents or that rich uncle or aunt that loves spoiling other people's children. As mentioned earlier, the beneficiary (the child that the account is intended for) can be changed so long as it stays within the family. There is also an annual limit to consider. Currently, for 2023, the annual contribution limit is $17,000 per contributor and a couple can give $34,000. Under the recent Secure Act 2.0, it will also allow for the flexibility of transferring unused funds to a Roth IRA. This could be beneficial in cases where there are no beneficiaries that would have the use of these funds.

Need help with the 529 plan options? We can help review a game plan and a strategy to plan for this really important journey in a child’s life. If you own a business, the business can elect to have a corporate 529 plan that will allow for employee contributions. Book a call or video chat to learn more.

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