Along with saving for retirement, one other financial challenge you’ll probably face as a parent is saving for your children’s college education. Count this as one of the bigger financial concerns that parents of young children have: the need to figure out how much college will actually set them back. How much do you worry about (or dread) the time when you’ll face a whole slew of expenses once the kids leave high school and enter the “real world” of college? There are calculators available online that help you get an estimate for college education, but the fact remains: whether your child ends up going to a state school or a private university, the costs seem astronomical.
General Benefits of 529 College Savings Plans
There are many options for parents to save for their kids’ college education. You could certainly funnel your child’s college funds into a savings account or a CD, but there aren’t any educational tax credits for using these personal savings vehicles. You could also consider using an educational IRA account (e.g. a Coverdell Education Savings Account) — which offers a few tax benefits for college savings.
But there’s one other great option that’s quite popular these days, which is a 529 college savings plan. It’s an awesome choice as it offers more benefits than most other college savings options, including:
- No taxes paid on the earnings of the account.
- Your child (or 529 beneficiary) doesn’t control or access the account, you do.
- Anyone can add money to the account.
- Most states do not have age restrictions for using the money.
- If your child (or beneficiary) earns a scholarship, the unused 529 account money can be withdrawn without paying penalties (you just need to pay tax).
- The money can be rolled over to another family member if the 529 beneficiary decides not to attend college.
Tax Benefits of 529 College Savings Plans
Along with funding our retirement accounts, we’re also highly encouraged by financial experts to save for our kids’ college expenses as it is also another financial goal that happens to employ many built-in tax benefits. Some of the tax benefits of saving with 529 plans include:
- Receiving an exemption from federal taxes when the funds are withdrawn for qualified education expenses. In most states, the earnings are also tax-deferred. Note however, that you will pay taxes on the 529 account earnings if you use the money for something other than college expenses.
- Allowing you to deduct a portion of your contributions to a 529 College Savings plan from your state taxes, in some states.
Eligible Uses of 529 College Savings Funds
The good news is that you’ve got a wide range of options available for your 529 college money. The “eligible” uses for the money you save in a 529 plan are fairly flexible, which makes this a good savings choice for a large number of families.
- Most states do not place an age or time limit for when money from a 529 account should be used. If your child decides to tour Europe for 8 years after high school, you have no worries if you’ve got a 529 in place. Your child can still attend college and fund it with their 529 account upon their return!
- If the original beneficiary of the account decides to nix college, the money can be rolled over into a different beneficiary’s 529 account — provided that the beneficiary is considered “family”. You can pretty much cast a wide net to cover most family members here. Who’s eligible? The original beneficiary’s spouse or any one of their children, sisters, brothers, nephews, nieces, first cousins, and even spouses of any of these people.
- Any degree-granting, accredited university qualifies as a recipient for your 529 funds. Even some international schools are considered eligible to receive such funds.
- Most states include tuition, room, board, computers, transportation and books as qualified educational costs that can be paid for by 529 plans.
How To Start Funding a 529 Account
If you’re ready to begin saving for college, check out your state’s 529 account offerings as well as those offered through other states. Plus here’s a quick tip: look into Upromise.com as a way of jumpstarting your 529 savings program.
College Savings Tip: Upromise often holds regular promotions for its members, in the form of scholarships and giveaways. If you’re already a Upromise member, you’re automatically entered. But if you aren’t yet, then you can enter and take part in any giveaway by joining the Upromise savings program at Upromise.com.
So what are we waiting for? Our children will be off to college in a blink of an eye, so there’s no better time than NOW…to begin saving for that event.
Guest post by Debbie D.
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