About 529 plans: Education savings with tax benefits
If you’re like many working-age adults with children, you’re striving to save for college education costs while also saving for your retirement.
A 529 plan can be a great way to set aside money for future education costs and get ahead on savings—while enjoying tax benefits, flexibility, and more.
529 plan standard features and benefits
- Tax-deferred contributions and tax deferral on any growth
- Federally tax-exempt withdrawals for qualified expenses* such as tuition, fees, and books (possibly exempt from state taxes, too)
- Flexibility to change beneficiaries—if one child chooses not to go to college, you may designate the funds to another child or even future grandchildren
- Full control of the money as the account holder
Choose from two types of 529 plans
- Prepaid tuition plans let the account holder purchase credits (and sometimes room and board) at eligible colleges and universities, locking in tuition prices ahead of time. Residency restrictions may apply.
- College savings plans allow greater flexibility in how and where the funds can be used, allowing for expenses such as mandatory fees, room and board, and textbooks without designating a particular school.
Because there are differences between the two plans, it's worth doing your homework to see what works best for your student.
Keep in mind that 529 plan structures vary by state. Because you're allowed to open a 529 savings plan offered by any state, shop around for the plan that best suits your needs.
"Be sure you fully understand your plan before signing up," says Jason Heffner, senior financial services representative with Principal®.
Saving for college with a Roth IRA instead? Know your options.
College savings plans may suit your situation better than a Roth IRA or other savings or investment plan, so it's worth reviewing your options. Consider that:
- 529 plans don't have the annual income restrictions that Roth IRAs do. That means you can make contributions even if your household income is high.
- The plans' contribution limits are quite high, so you can typically contribute much more than you can to a Roth IRA.
- On the flip side, 529 plans have low minimum contribution levels that help make them affordable if your household income is smaller.
- Funds in a 529 plan are considered an asset of the account owner, not the student, and typically won't impact the student's request for financial aid.
Make the most of your 529 plan
- Start early, add often. Consistency is key to a successful plan, says Heffner. He suggests contributing to the account on a monthly basis to stay on track.
- Review your plan regularly. Heffner suggests reviewing your 529 plan annually and making adjustments as needed.
- Continue saving for retirement. “Save for retirement first and college second," says Heffner. "It's possible to take out loans for education, but not for retirement."
- Sit down with a financial professional and discuss all the choices available to you for college savings.
* Earnings on nonqualified distributions (those that don't meet the requirements of qualified expenses) are taxed as ordinary income and may be subject to a 10% federally mandated penalty.