Top 9 Benefits of 529 Education Savings Plans

A 529 plan gives consumers an affordable way to pay for education, which is a boon for parents and other family members who want to save for a child’s education. A 529 plan offers several other advantages, including the ability to invest in potentially high-yielding assets, such as stock funds, instead of being limited to low-yielding bank accounts.

Among other things, “grandparents can use these plans as estate planning tools to help their grandchildren save for college, or as a family to create a relatively flexible education fund that can cover multiple children with proper planning,” says Bill Van Sant, CFP, is a senior vice president at Girard, a wealth management firm in Philadelphia.

Here are nine great benefits of a 529 plan and why this plan might be right for you and your family:

1. Tax-free growth for education

A 529 plan gives you an affordable way to save for education. You can keep the money after taxes and then grow it tax-free. When you withdraw money for qualified educational expenses, you also don’t pay any income taxes. But you have to be careful to use the money only on items that meet the rules of the plan – otherwise you will pay penalties.

Distribution restrictions are one of the key disadvantages of 529 plans.

2. Potentially high-profit investment options

Depending on which plan you choose — each state has its own options — you can invest in mutual funds and other market investments. This gives you the opportunity to earn huge returns on your contributions and the potential to beat the steep costs of college.

This opportunity, if used correctly, can far exceed savings in a bank account.

3. Potential tax benefits for contributions

If you invest through a 529 plan, you may even be able to get one tax deduction on your state income tax. However, not all states offer tax credits on your contributions, and you won’t receive a tax credit in a state where you don’t pay taxes. So choose carefully.

4. Two types of 529 plans

It’s often overlooked, but the 529 plan has a lesser-known option. Two types of 529 plans include:

• An education savings plan which allows you to open an investment account that can be used for future educational expenses, including tuition, room and board, books, and other expenses related to the educational program.

• AND prepaid tuition program allows you to purchase future college credits at current prices, although they are only available at participating institutions and are not available to elementary and middle schools.

Consider what type of plan best suits your needs.

5. The beneficiary can be changed

A 529 plan gives you a lot of flexibility about who can use the plan and when, Van Sant says.

“Parents can change beneficiaries in a 529 plan if the originally designated child decides not to go to college,” he says.

But you can also use the same 529 plan for multiple children. For example, if your children are not in college at the same time, the beneficiary can be changed after the first child graduates and the plan can be used for the second child. However, it probably makes more sense to simply set up a 529 plan for each child.

You are not required to close the account when the child has graduated or withdrawn.

“529 plans can hold assets indefinitely as long as there is a living beneficiary listed,” Van Sant says. “This means that the original beneficiary could change his mind and go back to school later in life, or he could have children of his own and name those children as the new beneficiaries of the plan.”

But you can even name yourself as the beneficiary and use the funds if you go back to school.

6. 529 plans aren’t just for college

Although 529 plans are usually associated with college education, they can also be used for private elementary and high schools. So, if you pay for K-12 education, you can also take advantage of a 529 plan. The expansion of the program was part of the Tax Cuts and Jobs Act of 2017.

The new rules also allow 529 plan distributions to be used in apprenticeship programs. Apprenticeships are now considered qualified higher education expenses if the training is registered and certified by the US Department of Labor.

7. 529 plans can be used to pay off student loans

In 2019, the 529 plan was expanded Security Law. A 529 plan can now be used to pay up to $10,000 into a beneficiary account student loans and an additional $10,000 in student loans for each of the beneficiary’s siblings.

8. A 529 can be converted to a Roth IRA

The The SECURE Act 2.0 made big changes about how a 529 plan can be used, and this is especially true for those who are afraid of committing too much to not being able to use the money. Beginning in 2024, a 529 plan can be rolled over to a Roth IRA for the account beneficiary.

But there are also some important details. The account must have been open for at least 15 years and extensions are limited maximum annual Roth contribution. The rollover amount is limited to $35,000 for life. Full details of the plan are still being worked out for a 2024 rollout. But that’s all the more reason to open a 529 plan sooner rather than later.

9. Anyone can contribute to a child’s 529 plan

While parents are most likely to contribute to a child’s 529 plan, other family members can also legally contribute to the plan. This includes close relatives such as grandparents, aunts and uncles, as well as less close relatives. In fact, anyone can contribute to a 529 plan and name a child as a beneficiary through your own plan or a plan owned by someone else.

How to get started with a 529 plan

It can be easy open a 529 planand you can start a 529 directly through a state-specific plan or through a broker. You can start a plan with any state, but you’ll need to do some research before opening one.

“Before choosing a 529, investors will want to evaluate 529 investment options to see how those investments have performed,” Van Sant says.

Be sure to see what investment options are available and how much they cost. Good investment options allow you to maximize potential profits and minimize costs.

“Additionally, investors will need to compare investments in their home state’s 529 plan with investments in another state’s 529 plan, as there are usually tax advantages associated with investing in a home state 529,” says Van Sant.

A financial advisor or website, for example Saving for college can also help you choose a program that fits your needs. It’s worth a look List of Bankrate’s 529 Best Plans to see if one is right for you.

“Once you figure out which 529 is best for you, setting up and funding it is pretty seamless,” Van Sant says.

Result

A 529 plan is a great ally in saving enough to pay for the rising costs of college, but an even greater ally is time because it allows you to grow your earnings. Combine the two by starting a 529 plan today, and you can put together a nice package when it’s time to go to school.