Posted on June 11th, 2021
Our recent blogs have compared 529 plans to all sorts of other financial instruments you can use to save for college. When stacked up against any other type of account, a 529 plan wins every time, but we haven't been giving 529 plans enough credit on their own. This week we are sharing our ode to the 529 plan. How do we love thee? Let us count the ways...
The tax benefits of a 529 plan are unmatched when it comes to college savings. Funds contributed to 529 plans grow tax-free, and there are tax-free withdrawals when funds are used for college expenses. Plus, 34 states offer residents a state-tax deduction for contributions. These benefits vary from state to state, so be sure to research your state's 529 tax benefits.
A 529 plan has the least impact on your child's financial aid eligibility out of all college savings methods. If the parent is the account owner, and you save $10,000 in a 529 plan, your need-based eligibility would only be reduced by a maximum of $564 instead of the $2,000 impact that same $10,000 would have if it were in a savings account.
A common misconception is that 529 plans are only for children who are going to college. While 529 plans cover the cost of college tuition, they also cover so much more. They cover trade school, community college, seminaries, graduate school, private K-12 schools, and international school tuition and expenses associated with these programs. Qualified expenses include tuition, fees, textbooks, supplies, and equipment required for enrollment at an institution. Qualified expenses include everything from buying a computer to paying for housing to purchasing a meal plan. When creating savings goals, many of us plan to cover the expected tuition costs but forget about the other costs related to college that a 529 plan can help cover.
529 plan funds can also be used to cover expenses associated with apprenticeships thanks to the SECURE act. If on-the-job training sounds like a better fit for your child, you can use your 529 plan to pay for fees, textbooks, supplies, and equipment necessary for an apprenticeship program. You can find out if an apprenticeship program is eligible through the Department of Labor search tool.
Another feature the SECURE act added to 529 plans is the ability to use funds for student loan payments. A 529 plan can cover up to $10,000 of student loan debt for the beneficiary and each of the beneficiary's siblings. This feature allows you to take leftover money from one child's 529 plan to pay for another's student loans. This is a great feature to take advantage of if one of your children gets a scholarship or decides not to attend college.
Many financial accounts have large minimum balances. These accounts require planning and saving just to open. Some 529 plans (like the one Scholar Raise uses) have no minimum balance so that you can open a plan without an initial deposit. Opening the account is half of the battle, keeps college savings top of mind, and makes contributing easy whenever you have some spare cash. Contributing small amounts consistently and as early as possible helps ensure you have plenty of time to benefit from compounding returns. With compounding returns, your money earns returns, and those returns can be reinvested every year. Let's say you generate 6% returns on $1,000. Next year, you can earn returns on both the $1,000 you started with and the earned $60. The longer your money is invested, the more years your returns can compound. If you contribute $1,000 today, your money would be worth $2,937 in 18 years without ever adding another penny. If you can consistently add $10 every month, you would have $3,893 in 18 years, and you would've only contributed $2,160. Play around with our college savings calculator to see how much you would need to contribute to meet your financial goals. With compounding returns, it might be less than you think.
529 plans earn an average of upwards of 6% annual return, which performs much better than a traditional savings account. Most 529 plans offer age-based investment strategies. This means that your portfolio will adjust based upon your child's age during the years leading up to college, allowing maximum growth (and risk) when your child is young, and then locking in that growth by becoming more conservative the closer your child gets to college.
If you're not an expert on investing, or you don't want to be researching different investment allocations constantly, this type of account allows you to set your child's age and then let the account do the rest. You can always adjust the allocations manually, but you don't have to, as the portfolio will automatically adjust based on your child's age. This investment strategy is simple but effective for saving with a target date.
Your money isn't lost if your child wins the lottery, gets a scholarship, or decides college isn't for them. You can withdraw funds from the account for any non-qualified expenditure and pay tax on the account's gains plus a 10% penalty. Don't let this scare you off though, remember that any regular investments you have would be taxed regardless of how the funds are used. If your child gets a scholarship, you can withdraw the scholarship amount without any penalty, but you will be taxed, just as you would on your other investments. You can also change the account's beneficiary to a sibling, grandchild, or another family member without penalty or tax consequences.
It takes a village to raise a child, and 529 plans reflect that. Friends and family can contribute to your child's 529 plan, and you will still enjoy the same tax-free growth and withdrawals for qualified expenses. The next time you're having a birthday party or graduation, consider asking for contributions to a 529 plan instead of toys that might never get taken out of the box. The gift of college will be far more memorable than more Paw Patrol stuff. With Scholar Raise, your friends and family can easily contribute through a customized link for your child. They can even contribute with a credit card.
Many financial accounts require you to go through a complicated signup process or even work with an expensive financial advisor. Setting up a 529 plan on your own can be complex, but when you sign up through Scholar Raise, we do the heavy lifting. All you need is five minutes and some basic personal information. We promise we won't make you hunt down a five-year-old tax return or dusty birth certificate that you haven't seen since you moved-- it's actually easy. We don't charge any advisor fees, so you can get the most out of the money you put into your plan.
In addition to the benefits of 529 plans, there are secondary benefits from saving from your child's education. Suppose you're blindsided by the cost of college tuition and use money from your IRA to help cover some of the cost or cosign on your child's loan. In that case, you are jeopardizing your financial future and ability to retire comfortably. Putting money aside in a 529 plan for your child's education can keep you on track for retirement.
Opening a college savings plan increases the odds that your child will go to college. Even with college savings between $1-$500, a child is 25% more likely to enroll and 64% more likely to graduate than a child with no savings.
529 plans are a great way to begin to teach financial literacy to your children. You can explain compound interest, savings, age-based investing, and more. Exposing your child to financial concepts at a young age helps set them up for a solid financial future. Showing them that they have a secure financial foundation can inspire their savings and investing journey.
Don't forget the benefits that your child will experience as a college graduate. Workers with a bachelor's degree earn on average more than $1 million more than graduates with a high school degree alone make during their working lives. The unemployment rate for people over 25 with a bachelor's degree is consistently about half of the unemployment rate of people with just a high school diploma. The value of a college education is well worth the cost of tuition, and starting to save early helps set your future student up for success.
529 plans are the gold standard of college savings for a reason. The tax benefits, easy investment strategies, and minimal effect on financial aid eligibility are unmatched by any other method for saving. Effective college savings can help your child avoid thousands of dollars in debt down the line and pave the way for a solid financial future. If you think a 529 plan could be right for you, you can easily open a plan at scholarraise.com. If you have more questions, reach out to us on social! We're happy to help.
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