Ever wondered what a 529 Savings Plan is? It’s a great way to start saving for your child’s college education, which as we all know can be pretty expensive!
The most important thing to know is that there are two types of 529 plans. The first one is like a savings account or a 401(k) or IRA. You get to choose from many different investments and your money grows over time. While there’s no upfront tax breaks on your contributions, the money you withdraw later for education is free from federal taxes. Even better, if you choose a plan based in your home state, you might get additional benefits!
The second type of 529 plan is prepaid. In this plan, you pay tuition costs upfront at today’s rates. This can save you a lot of money if tuition costs rise in the future, and who doesn’t love saving money! Remember, this type of plan might require you to commit to a specific school, though.
Prepaid plans come in three forms: Contract Plans, where you cover semesters or years at qualified colleges, Unit Plans, where you purchase “units” tied to a percentage of school costs, and finally, Voucher Plans, where you choose a percentage of tuition at specific schools. This means by the time your child goes to college, a part of their tuition is already paid!
One thing you need to be careful of is that not all colleges are included in prepaid plans. Some offer “in-network” and “out of network” options. So make sure to examine the list of schools covered by your plan.
But what if life happens and you need that money back? No worries, you can withdraw it at any time, but you’ll be hit with a 10% tax penalty and also pay taxes on any profit made. You can also change the investment structure once a year and even swap your plan to another type every 12 months. Plus, if your child doesn’t need the funds, you can change the beneficiary to another child or family member!
Are you using a 529 plan to pay for your kid’s college education? What influenced your decision when picking the state to base it out of? Remember, it’s never too early or too late to start saving for your child’s education. Let’s keep the discussion going!