Holiday shopping for kids can be hard. They have so much already, and the latest toys and games lose their luster not long after their initial thrill. But there’s one gift you can give today that will increase in value as the years go by – a 529 college savings plan.
“A 529 is a type of account that allows people – parents, grandparents or relatives – to save for college education like undergrad or grad school,” says Brent Perry, a financial planner and owner of Piedmont Financial Advisors.
“It’s one of the few accounts that has a double-tax benefit,” explains Marcus Miller, a financial advisor at Deerfield Financial Advisors. “The monies grow on a tax-deferred basis and then if withdrawn properly for college expenses, the withdraws themselves are tax-free as well.”
While the rules associated with 529 plans are the same from state to state, the tax benefits vary. Indiana has one of the most favorable incentives in the country.
Most states have 529 college savings plans. While the rules associated with 529 plans are the same from state to state, the tax benefits vary. Indiana has one of the most favorable incentives in the country. Bill Howell, Principal with Howell Financial Advisors, Inc. explains, “In Indiana if you open up an Indiana 529 account you will get a 20% tax credit for contributions of up to $5,000 in one calendar tax year.”
Some parents worry about the limitations of opening a college savings plan in a certain state. What if, for example, a child has an Indiana 529 plan but would like to go to school in California? “The Indiana plan doesn’t have to be used for Indiana schools only,” says Amelia West, a wealth advisor at Howell Financial Advisors. “It can be used anywhere.” Howell adds, “We have clients educating their children overseas using their Indiana 529 account.” West also points out that it’s not just college that 529 funds can be used for. “It can also be accredited vocational school and advanced training.”
The biggest disadvantage of a 529 plan is that it must be used for qualified educational expenses. “If you take the money out without using it for college, you have to pay taxes off of the growth and then you have to pay a 10% penalty,” says West. She points out, however, that if you no longer need the money because your child received a scholarship that you’ll pay taxes but not the penalty. And, if your child decides not to go to college, the funds can be transferred to another beneficiary, like a sibling.
As we all know, the cost of sending kids to college continues to grow. That’s why it’s important to start saving while children are young. “Every little bit helps,” says Miller, “especially when the child is young and you have lots of time for that compounding and tax-deferred growth to work to your advantage.”
For family and friends that want to contribute to a child’s education but aren’t the owner of their 529 account, the 529 Ugift program makes it easy to contribute. “You can go to the Ugift website and it is a way, essentially, to ease the administrative burden,” explains Perry. “A parent can open an account and then they can get a code and say, hey, if you want to contribute to the child’s account here is the code. If you make the contribution using the code it goes straight into their account.”
“College is obviously expensive,” says Perry. “It’s going to rise much faster than inflation in the foreseeable future. So money that is set aside now and allowed to grow is going to be a huge benefit. You are helping a student not have to take out even more student loans once they get to college.”