We’re continuing on with our strategies for saving money on investment taxes! Check out our previous posts for the first 4 strategies and other tips.
Strategy #5: 529 Plans
A 529 plan is a way to save for college. College costs are increasing much faster than the rate of inflation. The government put together a plan to help families save up for future college expenses.
Here are some highlights of a 529 plan:
- A 529 plan works quite similar to a retirement account. This means when you put money into a 529 plan, you don’t owe taxes on your investment gains as long as the money stays in the account.
- A 529 plan gives you a tax-deferred way to save for a child’s college expenses. When your child goes to college, you can just take money out of the 529 plan tax-free and spend it on college expenses. Basically, all the investment gains are tax-free with this type of account.
- On the flip side, say your child doesn’t want to go to college. As the parent, you can still use this account for future goals. It’s not just locked in for education. However, there will be a penalty if that money is used for something else.
The College Board generally has good resources on 529 plans on their website. The College Board is a non-profit organization that gives information to those interested in going to college and discusses issues such as college costs.
Common Mistakes with 529 Plans
With a 529 plan, the benefits are there because it’s supposed to be used for educational purposes. If you put money into a 529 plan, you’re supposed to use it for college expenses.
Here are some common mistakes people make with 529 plans:
- If you take money out for any other purpose, you’ll owe an extra 10 percent penalty on the withdrawal.
- If your child decides not to go to college, you’ll at least get to take out your money minus the penalty. Then, if your child changes his mind and does go to college later on, you can still use whatever money is left in the account, which could be the entire amount if you’ve never touched it.
- One major mistake is if you set up a 529 plan and then close it two years later. Now you’ve wasted a bunch of money because you didn’t use this type of account correctly.
Remember that 529 plans limit the amount you can put in per year. Each person can only contribute $14,000 per year, per beneficiary, into a 529 plan. If you’re married, you can put up to $28,000 per beneficiary, per year, into a 529 plan.
“Financial literacy is an issue that should command our attention because many Americans are not adequately organizing finances for their education, healthcare, and retirement.”~Ron Lewis
Thanks for reading! Stay tuned for more savings tips and investment content.