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Hi Taylor
- Wondering if you can explain 529 plans to me. One of my New Year's
Resolutions is to put aside college savings for my kid but I'm getting
a little confused about the best way to do it. - Scott
Hi Scott - Happy to break down 529 plans. And, for a more detailed
answer, you can head to GoFarWithKovar.com
and read a full article about the different options for saving up
for college. In the meantime, here are my three main points about
529s. |
1. Two
plan options. 529 plans are offered through individual states
and provide two choices for investors. You can either get a prepaid
plan, in which you pay a portion of tuition at today's prices,
or you can go with the savings plan and keep accruing wealth between
now and when your kid goes to school. Both options will save you
money, it just depends on how far ahead you've thought this through.
Also, it's important to be aware that you are not limited to using
a 529 plan from your home state, but each state does have its
own guidelines.
2. Tax incentives. One of the best aspects of this type of
savings account is the tax benefit. Again, these vary by state,
but you can generally avoid state and federal taxes on the money
earned by whatever you invest into the account. The tax incentive
goes out the window if you try to use 529 funds for anything other
than tuition, books, and other education-related expenses. As
long as you don't contribute more than $15,000 in a given year,
you should also be able to avoid a gift tax. Just as retirement
accounts help people save money on taxes, 529 plans offer a great
way for people to save for college so that more Americans can
get an education without falling into debt.
3. Education only. Should you save and save and save and
then your child decides not to go to college, the tax incentives
won't hold up. However, these accounts are transferable in case
another family member plans to go to school or you want to reinvest
in your own education. If no one intends to use the account for
qualified expenses, the funds will not only be charged normal
income taxes but also a 10% tax penalty, just as you'd see with
an early withdrawal from an IRA.
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There are obvious
benefits to a 529 plan, and if you know for certain that your child
will go to college, this is a great option. If that future is less
clear in your mind, you can look into other accounts that allow you
to save with a little more flexibility. Hope this helps!
© Taylor Kovar
January 8, 2020
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| Disclaimer:
Information presented is for educational purposes only and is not
an offer or solicitation for the sale or purchase of any specific
securities, investments, or investment strategies. Investments involve
risk and, unless otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser and/or tax professional
before implementing any strategy discussed herein. To submit a question
to be answered in this column, please send it via email to Question@GoFarWithKovar.com,
or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.
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