I recently spent time with my daughter and niece at a girl scout camp. To save money on travel, our troop decided to carpool. As I rode with another mom and her daughter to and from camp, we talked about the typical topics and things of life. Our conversation arrived at college expenses because my son graduated from high school and would be starting his first year of college this fall. Preparing for the expense of college may not be the forefront of your thoughts, however getting an early start on saving will help you stress less.
- 529 plans offer a tax-advantaged way to save for college. Contributions to a 529 plan are typically not taxed, and any earnings on the plan grow tax-free.
- Distributions from a 529 plan are also typically tax-free, if they are used to pay for qualified education expenses.
- 529 plans can be used to save for college expenses for any family member, not just the account holder. There are no income restrictions for contributors or beneficiaries of a 529 plan.
- Most states offer their own 529 plans, which may offer additional tax benefits or other incentives, like matching contributions.
- The funds in a 529 plan can be used at any eligible college or university in the country (and some abroad).
- One downside of 529 plans is that if the account holder withdraws funds for reasons other than qualified education expenses, they will have to pay taxes on the earnings plus a 10% penalty.
- A downside of 529 plans is that if the account holder doesn't use all of the funds in the account, they may have to pay taxes and penalties on the unused amount when they take distributions later on.
- Some families may find that they don't have enough money saved up in a 529 plan to cover all their child's college costs.
- If you switch schools or decide to attend a different type of school than what was originally planned (pre-paid 529), your 529 plan may not cover all your costs.
- 529 plan ownership could affect federal financial aid