529 College Savings Plans Score High Marks for Tax Savings, Flexibility

Set aside $14,000 per parent, per child, per year with a 529 plan

Back-to-school time is here. As you shift from summer vacation to the upcoming academic year, it’s a good time to study the best ways to save for your child’s college education.

529 college savings plans score high marks as one of the best ways to save for secondary education. James Allen, Infinitas advisor, says, “The investment tool offers first-in-its class tax savings and flexibility.”  

Here, Allen offers the ABCs of 529s:

  • Once your child has a Social Security Number, you can set aside $14,000 per parent, per child, per year. In short, a married couple can invest up to $28,000 a year in a 529 for each child.

  • Grandparents, siblings, relatives and even friends can contribute to a child’s 529 – each with their own $14,000 annual limit.

  • The funds can be used for tuition and related fees, housing, books and school supplies, as well as computers and internet expenses.

  • Earnings in 529s grow tax-free. The money isn’t taxed until it’s withdrawn and used for eligible expenses.

  • More than 30 states offer additional tax deductions for 529s – giving contributors a potential double tax savings.

  • If you don’t use all the 529 money saved for one child, the funds easily transfer to another child – without being taxed.

While 529s offer potential tax savings, there’s risk of a tax penalty if the funds aren’t used for college. “Money withdrawn from the account not used for higher ed is subject to a 10 percent penalty,” Allen said. “Plus, what’s taken out of the account is taxed at the contributor’s current tax rate.”

Do the math: 529s or pre-paid tuition plans

Another tool parents use to save for college is a pre-paid tuition plan. But when you compare the two, Allen says a 529 offers more flexibility than the pre-paid option. “A 529 can be started at any time, whereas a pre-paid plan often has an enrollment window.”

A few other benefits 529s offer that pre-paid plans don’t:

  • 529s cover more college expenses

  • 529s offer greater investment options

  • State and beneficiary rollovers are easier with 529s

There’s one more way 529s give more flexibility than pre-paid tuition plans: front-loading contributions.

Allen says each parent or loved one can “front-load” $70,000 in a 529 plan one time every five years. “It’s a good way to try to maximize college savings returns whether your child is two years-old and you’re saving early or they’re 16 and you’re trying to catch up,” he said.

Want more info about the rules and tax implications of your state’s 529s? There’s no need to hit the books. Just check out: www.savingforcollege.com or contact us at info@infinitaskc.com to talk about how a 529 may help your family maximize tax savings and minimize college expenses.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.