To say that college tuition is incredibly expensive is a major understatement. In fact, the average annual cost of college in the United States, including books, supplies, and everyday living expenses, is $35,331 per student. This expense has more than doubled in the 21st century, with an annual growth rate of 6.8%. For parents who wish to help pay for their children’s college tuition, these amounts are understandably quite daunting. Fortunately, there’s a way to help make the process of saving for college a bit easier. Called the start a 529 plan, this tax solution allows families to put away money for higher-education expenses while taking advantage of several benefits.
To learn more about the 529 plan, as well as some of the reasons to start and invest in one, consider the following:
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But First, What is a 529 Plan?
Put simply, a 529 plan is a tax-advantaged savings plan that helps families save for college. The savings in a 529 plan will grow tax-free and withdrawals are also free from income tax — as long as they are used for specific education expenses. These include required tuition costs and fees, books, supplies, computers and other related equipment, computer software, and internet access.
1. There are Tax Benefits Abound
Families that invest in a 529 plan will enjoy a number of significant tax advantages. For example, making deposits into the plan allows contributors to reduce the size of their taxable income. Moreover, the earnings from a tax-advantaged savings plan will grow tax-deferred, and, depending on in which state you live, you might also qualify for a state income tax deduction or credit for your contributions.
2. You Stay in Control of the Money
Another key benefit of starting a 529 plan is that the owner, who is usually a parent, will have complete control over the funds. This helps ensure the savings are used as intended — for college tuition and related costs — and not for other extravagances like a new car, clothing, or entertainment. This is different from a custodial account in which the child will eventually take control of the money once he or she reaches legal age.
3. These Plans are Low Maintenance
For parents who like a hands-off approach to saving for college, the 529 plan is definitely the way to go. Many plans allow you to set up automatic investment amounts that will be taken directly from your bank account. Then, rather than having to make decisions about investments being made with funds in the plan, the 529 plan will be managed by an outside investment company.
4. Anyone Can Open a 529 Plan
Opening a 529 plan is easy. You don’t have to make a certain level of income or be in a specific age group. While there are limits to the total amount that can be contributed, there are no annual limits. Thus, if you have a particularly great year financially, you can contribute more without incurring a penalty — and grandparents, other relatives, and friends can also make deposits into the account if they wish.
Paying for College is Doable with the Help of a 529 Plan
Make no bones about it — paying for college will always be a rather expensive endeavor. However, by opening and contributing to a 529 plan, your savings will eventually help pay for your child to attend college. From various tax benefits and keeping in control of the money to making automatic contributions and being able to open one with ease, starting a 529 plan makes a great deal of financial sense.