As a parent, saving for college is no easy task. According to CNBC, the average 4-year public college tuition has increased at an alarming rate of 213% since 1988. And it’s no different for 4-year private institutions, with tuition rising by 129% since 1988. Saving for these significant tuition increases can seem nearly impossible. But there are certain savings plans that can help you save and offer other benefits such as tax advantages.
A 529 plan is a savings account that makes a significant investment in terms of tax advantages. It’s one of the best ways to finance qualified education expenses providing a plethora of remarkable benefits.
In the end, the best way to pay for the education of your child is by saving at the most beneficial terms, and 529 plans do exactly that. Here we’ll look into what exactly a 529 college savings plan is, how it works, and the benefits it holds:
How Does a 529 College Savings Plan Work?
A 529 plan allows you to save for college education by offering special financial aid and tax benefits. You can use these plans to save for tuition or as an investment to cover a variety of college costs, from fees to school supplies.
There are two types of 529 plans:
- Prepaid tuition plans – a plan in which you pre-pay some or all of your child’s public in-state college tuition.
- College savings plan – the plan we will be focusing on throughout this piece. This plan is similar to a Roth IRA in the sense that you invest your funds in investments and your funds will fluctuate and grow with time.
Any college that’s qualified nationwide accepts 529 plans, and you can use them to pay for any college, regardless of the state you live in.
The main point of such a plan is that it offers tax-free withdrawals and tax-free earnings growth each time you use your money to cover the expenses of the qualified education. These expenses include:
- Tuition
- Room and board
- Computers
- Additional equipment
- Supplies
- Books
- Fees
The Benefits of a 529 College Savings Plan
A stated, education expenses are getting higher and higher every year. Parents and grandparents need a lifeline that will help them cope with the cost of higher education, and a 529 college savings plan can be that lifeline.
These plans give parents a certain level of financial flexibility, but more importantly, these plans offer advantages that go far beyond tax-free investment growth.
Let’s delve deeper into some of the advantages a 529 plan offers, which makes it increasingly worthwhile.
1. Tax Breaks
With a 529 plan, you can get a credit for contributions or a tax deduction. If you use the funds to pay the cost of qualified education, you can withdraw the money free of taxes, or use tax advantages to grow your earnings.
2. You Can Hold More Than One 529 Plan
There are no limits as to how many 529 plans you can hold at the same time. If you already have a plan in your state, but you need another, you can always consult with financial professionals to find the one that works best for you. In fact, most people choose to open multiple accounts and benefit from the advantages.
3. Choose the Best Investment for You
There’s a wide variety of investments to choose from for that 529 plans offer. These investments include fund of fund portfolios, exchange-traded funds, and mutual funds. A standard 529 plan consists of either age-based or risk-based options.
4. Generous Limits
The state you live in sets the limits on how much you can contribute in total to a 529 plan. Still, with the threshold being high, in most states, you can make contributions up to $400,000.
In addition to this, 529 plans have one massive advantage over any other savings account – there are no income restrictions.
5. Compound Interest
Compound interest can do miracles when it comes to 529 plans. You can front-load your account and save it to enjoy the benefits of being free from any taxes. Just imagine in ten years the benefits of interest compounding will exceed your expectations.
6. You Control the Account
To make sure that the funds are used for the intended purpose, you stay in control of the account as the primary donor, while the named beneficiary possesses no legal rights to the funds included in a 529 account. The owner of the savings account can choose to withdraw funds any time they see fit.
Finding the Best 529 College Savings Plan with Melton McFadden
Now that you know how 529 plans work and the benefits they offer, consider the following concern – finding the best 529 college savings plan. Melton McFadden provides financial planning services in Michigan, and these services include finding the 529 plan that suits your budget and needs.
We will
work with you to come up with a plan that enables you to invest and save on a
tax-deferred basis at a variable rate of return. Funding college has never been
more accessible, so contact Melton
McFadden for the top financial planning services in Michigan today!
