Many parents want what’s best for their child–and for many, that means having the funds available to send their children to college when the time comes. Saving for college, especially as the cost of tuition increases, is a great way to help your child stay out of debt in those immediate post-high school years and give them the best possible start in their new careers. Figuring out how to do that effectively, however, can turn into a headache for many parents. 529 savings plans and other strategies can help pave the way for your child’s successful future.
What is a 529 plan?
A 529 plan is much like a 401(k) in that it’s a specific savings account for a specific purpose. You’re able to save money for your child’s college without being taxed on the income from those savings, which allows your principal to grow faster. It’s also a highly protected savings account, since there are fees associated with removing funds for any other purpose.
Do you have to pay taxes when you withdraw 529 plan savings?
If you withdraw money from your child’s 529 plan to pay for college tuition or qualified expenses–books, room and board, etc–you won’t have to pay taxes. If you use the money for other expenses, however, you will be expected to pay both taxes and a 10% penalty on the money used.
What can 529 plans be used for?
529 plans can be used for any post-high school education expenses. This includes trade schools, vocational schools, and four-year colleges and universities as well as master’s programs and graduate school. These plans can also be used to pay for room and board while your child is in school, as well as paying for books and materials that are necessary for the college experience.
Does a 529 plan belong to me or my child?
The 529 plan belongs to you, not to your child. That means that it has several advantages:
- Your child won’t be able to withdraw funds on their own and use them irresponsibly.
- You can continue putting money back with the expectation that your child will attend college later, even if they choose not to attend immediately after high school.
- You can change the beneficiary of the fund, which means that if one child doesn’t use all of their savings, it can be shifted to another child.
When should I start saving for my child’s college?
You’re probably not thinking about your child’s college savings plan when they’re in diapers–but maybe you should be! As tuition costs rise, it’s more critical than ever that you begin putting money aside for your child’s college education as early as possible. Remember that the sooner you start saving, the longer the money has to accrue interest–and the less you’ll have to set aside each month in order to have a solid nest egg to provide for your child.
I want my child to help contribute to their college savings. How can they participate in this process?
Your child can start contributing to their college savings as early as they like–though it’s certainly easier when they’re old enough to have income of their own! Birthday and holiday gifts from well-meaning relatives can be placed in their college savings account from the time they’re young, especially if your child has no other use for the money. Once they’re old enough to start working, your child should be encouraged to use the money they make to contribute to their college savings plan.
Is a 529 plan my only option for college savings?
No! You have plenty of options for saving for college. A Roth IRA is another great plan that will allow you to set aside money specifically for education. You can also opt for a prepaid tuition plan with participating colleges and universities, though that may limit where your child is able to attend school when they’re ready.
College is a major milestone in your child’s life. You want to offer them the best possible chance to succeed, and setting aside money for college expenses now is one of the best ways to make that happen. By opening a 529 plan or other college savings account for your child, you give them a great start in their college planning and make it possible for them to accomplish their dreams and goals without going deeply into debt.