Once you know you’re expecting a baby, you will be inundated with all sorts of offers to assist in the financial wellness of your baby. From life insurance to 529 plans, it can be difficult to navigate which route would best serve you and your family. Many families are told that they should be creating a 529 plan for their baby, but what is it and does it really help set your baby up for financial success?
What is a 529 Plan?
The 529 plan is a tax-advantaged savings plan designed to help people save for education. The plan can be used for tuition and qualified higher education expenses. Recently, they also included apprenticeship education to 529 plans.
There are two types of 529 plans: Education Savings Plan and Prepaid Tuition Plan. They both have different methods of operation depending on the state.
Since the provision of 529 plans, about 20% of Americans in the 50 States of the USA and the District of Columbia have embraced this plan.
529 plans can be purchased from the state, broker, or financial advisor. While they are for everyone, it’s set up by mostly parents and grandparents for their kids and grandkids, respectively.
This plan was enacted by Section 529 of the Internal Revenue Code. So, to reap the benefits of this plan and have fewer worries about educating your children through college, you should set it up as soon as possible.
Why should I set up a 529 for my child?
- One of the benefits of 529 is its tax advantages. Individuals are able to withdraw money from their 529 for qualified education expenses tax-free. It doesn’t attract federal government taxes, but depending on the state, the tax on your 529 can either be removed entirely or reduced.
- It’s easy to open a 529 plan. Most banks will offer 529 plans so you can easily open an account online. You can choose the automatic investment plan and link it to your bank account, then simply forget it until it’s needed. It doesn’t require much to keep a 529 plan going.
- Unlike other accounts like 529, it doesn’t have limits on the yearly contribution or its total amount. It also does not affect eligibility or application for financial aid.
- It is flexible compared to other similar accounts. This means you can transfer it from one child to another if the first designated child doesn’t further their education, has the money, or is granted a scholarship. Your child can also use the 529 to attend school in any state of their choice.
What are some disadvantages of a 529 plan?
- You don’t have much control over a 529 plan.
- Without incurring tax, you cannot use the funds from a 529 plan for non-educational purposes. This effect is more notable if there’s a non-educational emergency, if your child decides against further education, or if the amount used by your child isn’t up to the amount saved.
- 529 plans can cause your expected family contribution (EFC) to increase since it’s an asset. This can drastically reduce and even prevent your child from qualifying for different financial aid programs.
Make sure to speak with your accountant and go over the numbers before you decide that the 529 plan is the best route for you. Make sure you are also calculating how this may impact you when it comes time to start withdrawing from the account.