For those of us with little goofers of our own running about, a 529 college savings account is a great way to start saving for their college education expenses.
Each state offers its own plan. Much like your 401(k) plan at work, they offer a set list of investments and the assets inside can grow tax free. As of 2020, you can gift up to $15,000 per year per spouse to each child’s account without having to file a gift tax return. You also have the option to do five-year forward gifting, allowing you to lump the next five years gifts into one tax year ($75,000/spouse). However, no other gifts can be made during that period. Once the account balance reaches $300,000+ no other contributions can be made. State rules vary. Visit www.savingforcollege.com to review state options for 529 plans.
Some states offer matching contributions or state income tax deductions on your contributions. There are no federal tax benefits on contributions. If withdrawals are made for qualifying expenses, then you will not owe any taxes on the investment gains received. If you take money out for other purposes, you must pay a 10% penalty and income tax on those earnings.
Morningstar publishes a ranking of 529 plans annually. You can participate in any state’s 529 plan, but there may be tax benefits and incentives for participating in your state’s plan. Picking the best plan with lowest fees should be priority.
The passage of the Secure Act expanded 529 plans to now include student loan repayment and support for homeschooling and apprenticeship programs. Approved uses for 529 plan funds now include up to $10,000 of principal or interest for student loan repayment, which can also be used for siblings. Also, funds can be used to pay for fees, books, supplies and equipment for homeschooling and apprenticeship programs as long as the program is certified with the Secretary of Labor.
See our flyer where we created some projections to help you understand what balances you might expect if you save $50, $100, $200 or $300 monthly along with some key takeaways.