If you ask 10 different people how you should save for your children’s higher education, you’ll likely get 10 different answers. The tips may range from “invest in stocks” and “start a dedicated savings account” to the more whimsical “toss your quarters in a coffee can.”
While these approaches can, in theory, help you save for your children’s tuition, one of the best ways to do so is with the help of a 529 plan.
What is a 529 Plan, and How Does it Work?
A 529 plan is a tax-advantaged savings plan sponsored by states and helps families save for their children’s higher education costs. Over the years, the account will grow tax-free, and withdrawals are also not subject to income tax — as long as they’re used for education expenses, like tuition, fees, room and board, and books.
So, what are the other benefits of a 529 plan compared to other ways of saving for college? Consider the following:
1. It’s Hard to Argue with Tax-Free Growth
As noted, a 529 plan offers some significant tax-related advantages. More specifically, the account will grow tax-free and won’t be subject to any capital gains taxes. And, depending on your state of residence, you may also be able to secure a tax deduction on your state’s income taxes. Now, this varies depending on where you live, so be sure to ask your financial advisor or accountant if you qualify.
2. Investments Can Have a Nice Return
Of course, you could also follow the advice of family and friends by opening a savings account for your children’s education. These days, however, the average savings account earns .05% in interest, which is virtually negligible. With a 529 plan, you can invest in either stocks or other market-based investments, which historically do much better in terms of growth. Depending on market performance and which investments you make, it’s possible to see growth that outpaces your contributions and turns into a generous nest egg by the time your child heads off to college.
3. Control Can Be a Good Thing
While funds from other college savings plans, like a custodial account, must be made accessible to your child when he or she turns 18 to 21 (state laws vary on this), with a 529 plan, you stay in control. This way, you can be 100% sure every dollar in the plan will go directly toward paying for college and related costs. Indeed, it won’t end up being squandered away on late-night pizza runs, weekend road trips, and other non-college-related expenses by a well-meaning teenager who suddenly has access to a great deal of money.
4. There are Age-Based Options
You don’t have to be knowledgeable about investing to come up with a successful savings strategy for your 529 plan. For instance, you can select a group of investments based on your child’s age when you open the plan and your level of financial risk tolerance. Thus, if you start a 529 plan when your child is a toddler and you’re hesitant about risk, you might opt for a more conservative plan. On the other hand, if your child is already in middle school and “Risk” is your middle name, you may want to go with a 529 plan that relies heavily on stocks or other investments that can increase in value rapidly.
Skip the Folger’s Can, and Go with a 529 Plan
When it comes to saving for college, there are a number of options at your disposal. And while, technically, any money that you can stash away for tuition is a good thing, the 529 plan, with all of its advantages, is definitely a sound financial decision. Happy saving!