Rowling & Associates Blog

Saving for Education with a 529 Plan

by Jeff Ortega

In this day and age, it’s never too early to start thinking about college! If you are a new parent or grandparent, you may be wondering how you can ever afford to help your child or grandchild through four years of school. There is a solution to this dilemma! A 529 plan lets you save for your child’s education and comes with additional benefits.

What is a 529 plan?

A 529 plan is an investment account that you can use to save for education. These plans are usually sponsored by states. They can be used for any family member, and often offer tax benefits. In this post, we will look at the different ways a 529 plan can help you to reach your educational savings goals.

Tax Benefits with a 529 Plan

The biggest advantage of saving with a 529 plan is the tax benefits it provides. While California does not offer residents a tax deduction, many other states let you deduct your 529 plan contributions on your state income tax return, up to your state’s limit. That translates to a higher account balance and lower taxes for you. Also, your earnings will be deferred from federal and state taxes, which is another benefit to investing in a 529 account rather than a taxable account.

You won’t be paying taxes on the money you withdraw to pay for qualified education expenses. In other words, in most cases you won’t have to pay state or federal income taxes on earnings in your 529 account as long as you use the money for qualified expenses. K-12 tuition of up to $10,000 per student per year at a public, private, or religious school can also be treated as a qualified education expense with respect to the federal tax benefit. State tax treatment of K-12 withdrawals, however, is determined by the state where the taxpayer files state income tax.

There are also gift tax benefits to opening one of these accounts. You can make up to 5 years’ worth of contributions at one time without triggering gift tax.

How do I use my 529 plan?

You can use this money for qualified higher-education expenses, including tuition at an accredited school, as well as room and board, fees, books, supplies, equipment, computer hardware and software, and internet access and related services. Qualified education expenses also include payments of student loans for an accredited school (up to a $10,000 lifetime limit per beneficiary). You can also use your 529 assets for K-12 tuition of up to $10,000 per student per year at a public, private, or religious school.

This money does not just have to be set aside for your children. You can start saving for a child, grandchild, other family member, or even for yourself to pursue further education. You can also save for an unborn child and transfer the account from yourself to your child once he or she arrives.

Other Benefits

As the account owner, you (not your child) have control over when and how your money is spent, even after the person you are saving for becomes an adult. If something comes up and you really need the money for purposes other than education, you’ll have access to it. You may have to give up some of your earnings, but you won’t pay a penalty on the amount you originally invested.

Most 529 plans allow you to choose from a variety of portfolios that have stock, bond, and international exposure, so you can give your money plenty of opportunity to grow. You can save as much to this account as you would like. Plan maximums are usually between $300,000 and $500,000 per student.

As long as you are the account owner and your child is a dependent, the savings in a 529 account will have a much lower impact on financial aid for higher education than a different type of account opened in your child’s name. And, if one child (or family member) does not use the funds for education, you can transfer the funds to anyone else in the family (as far out as a first cousin) and use the funds for another family member’s education expenses.

Many 529 plans offer age-based investment options that automatically rebalance and become more conservative as the child gets closer to college age. Keep in mind, however, that age-based options are generally designed for higher education savings and may not be appropriate for K-12 time horizons.

Final Thoughts

If you live in California, or a state that does not offer state tax deductions, then you can invest in any state plan. At Rowling & Associates, we recommend the Utah 529 College Savings Plan due to its reputation. We do not manage these plans at Rowling & Associates, but our team can help you get started and open an account. Feel free to contact our office if you are interested in saving for education using a 529 plan.