3 Reasons Every Parent Should Consider The 529| . Plan Smart Change: Personal Finance
A 529 plan is designed to help you save on higher education expenses for a child or family member. These plans are administered and managed at the state level, so some aspects can vary by state, but they all serve the same purpose. There are two options for the 529 plan: Prepaid and Save. 529 prepaid plans basically let you pay for future tuition at today’s rate, and 529 savings plans, which are more popular, work similarly to retirement savings accounts as standalone retirement accounts.
Here are three reasons every parent should consider a 529 plan.
1. There are tax advantages
You make after-tax contributions to a 529 plan, but unlike a regular brokerage account, your investment grows and the compound tax deferred. Contributions to the 529 plan are not federally tax deductible, but some states allow deductions. For example, North Carolina does not allow deductions, South Carolina allows you to deduct the full amount of your contribution, and Georgia allows a deduction of up to $4,000 ($8,000 if joint beneficiary).
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In addition to your increased investment in tax-deferred, you can also receive tax-free withdrawals from a 529 plan for qualified education expenses, such as tuition, housing, computer software, books, and meal plans. If you plan to send your children to a private school during kindergarten through 12th grade, you can also use 529 study plan expenses (up to $10,000).
If you are saving your child’s tuition fees, you can do so in an account with tax benefits. Deferring the compound tax on your money with tax-free withdrawals can easily save you thousands in taxes.
2. They have high contribution limits
Unlike Coverdell educational savings accounts—which have $2,000 contribution limits—529 plans have no annual contribution limits. However, they have total contribution limits that range from two hundred thousand to over half a million, depending on your state. The total contribution limit is the amount of the total contribution to the plan, but there is nothing that limits how much you can contribute annually.
If your goal is to contribute $100,000, you could make $10,000 over 10 years or $25,000 in four years; The choice is all yours and up to your possibilities. Once you contribute to your state’s total contribution limit, you can no longer contribute to the account, but it will still earn money. If you have multiple children, these high contribution limits can be a huge benefit.
3. You don’t need to be an experienced investor
Although the money in 529 plans is invested, you do not need to be an experienced investor to have a good portfolio that will provide good returns in the long run. If you prefer to set your investments only and don’t have to worry about it, you can choose one of the age-based funds in your plan. This money is reallocated over time, and becomes more conservative as your child approaches college age. Since stocks have higher risk and higher reward, the fund will be heavy early on to grow and then switch to “safer” investments to focus on preserving what you’ve earned.
Age-based funds tend to charge higher fees because they are managed effectively, but if you use the “set it and forget it” method, it may be worth it.
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