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Baby Einstein, Mickey’s Playhouse, Nickelodeon… education starts at a very young age. Just as learning should start early, so should saving for education. As you sing along with Sesame Street’s daily number ditties, we encourage you to remember three important digits: 5, 2, and 9. 529 Plans are one of the most tax-efficient ways to save for college. Although there are other saving options available, here are the top three reasons to love 529 Plans:
A Simple and Group Effort
529 accounts can be opened online, and once established, loved ones can easily contribute. Birthday and holiday gifts from family members and friends can really add up. With competing financial priorities like home ownership and retirement, making college savings a group effort may be necessary. Annual $50 birthday gifts from just four family members can add up to more than $6k over time, which will go a lot further than a disposable toy!
Less Tax Means More for College
Investment earnings in a 529 Plan grow tax-deferred and distributions used to pay for qualified higher educational expenses may be taken tax-free. Sheltering investment tax on growth allows for more money to stay invested, compounding growth faster. Although contributions to 529 Plans are not federally tax deductible, some states allow contributions by residents to be deductible at the state level.
To maximize 529 Plan benefits, funds really should be used for college, but flexibility is far from lost. For starters, compared to other savings vehicles that allow children to take full control of assets as early as age 18, 529 funds allow parents to maintain control of plan assets, indefinitely. Additionally, although each account is set up with just one beneficial child, funds don’t need to be used for that child. In the event one child doesn’t go to college or use up all of his or her funds, plan assets can be used to fund college for other siblings or family members simply by changing the beneficiary. Finally, taxes will apply, but in the event of a financial hardship, plan assets are always available (earnings are subject to a 10% penalty plus ordinary income tax).
For information on college costs, saving targets and other funding vehicles, click here.