How to Supercharge Your College Savings With a 529 Plan

A recent survey found that 70% of parents are worried about how to finance their kids’ college education, up from 63% just a few years ago. Many are concerned not just about the immediate costs but also about the long-term debt their children might incur.

Parents are right to be concerned. The cost of attending college has more than doubled in the 21st century and continues to rise by more than 4% annually. Today, the average annual cost of college in the United States is $38,270, which includes books, supplies, and living expenses.

Interestingly, while more parents are saving for college than in the past, many still fall short of what’s needed. On average, they’re only on track to cover about 30% of expected college costs. That gap between savings and reality is fueling a lot of stress.

Fortunately, there is a way to close that gap. Families can boost their college savings by setting up a 529 education savings plan.

What is a 529 Education Savings Plan?

Named after Section 529 of the Internal Revenue Code, a 529 savings plan is designed to help you save for future education expenses while providing attractive tax benefits.

529 plans allow families to invest money in various investment options, such as mutual funds, to save for future education expenses, including tuition, room and board, supplies, and other qualified expenses at eligible colleges and universities.

Tax Benefits of 529 Education Savings Plans

Low interest rates on savings accounts and taxes make it difficult for parents to keep up with the rising cost of college. That’s why 529 plans are so advantageous.

Contributions to a 529 plan are not tax-deductible. However, your investment grows tax-free, and withdrawals for qualified education expenses are also tax-free. Additionally, many states offer tax deductions or credits for contributions to a 529 plan.

529 plans are a valuable tool for planning and saving for education expenses. However, it’s important to keep in mind that if you withdraw money and do not use it for college expenses, the earnings will be subject to income tax and an additional 10 percent federal tax penalty.

Estate Planning Benefits

Contributions to a 529 savings plan are considered completed gifts for tax purposes, which can help lower your taxable estate. In some cases, you can contribute up to five years' worth of gifts at once without incurring federal gift taxes. This strategy can be particularly effective for wealthy families looking to pass on their wealth while supporting education as part of their legacy.

Flexibility and Control

A significant advantage of 529 plans is their flexibility.

• You maintain control over your account and can easily change the beneficiary to another eligible family member if the original beneficiary decides not to attend college or receives a scholarship. You can also open an account and name yourself as the beneficiary, allowing you to contribute to the plan and later withdraw the funds to pay for your qualified education expenses.
  

• 529 savings plans feature high contribution limits; many states permit contributions of up to $500,000, allowing families to accumulate substantial savings over time.

• Funds from 529 accounts can be used at various educational institutions, not just traditional four-year colleges. They may also be used at vocational schools, community colleges, and some international institutions.
  

• There are no residency requirements for 529 plans, so you can enroll in any state plan that appeals to you. However, Illinois residents who choose a plan from another state will forfeit the state tax deduction.

• Relatives such as grandparents, aunts, uncles, or siblings can set up an account for the benefit of a child or other family member. A friend of the family and certain entities, such as trusts, can also open a 529 plan.

Don’t Miss Out

Despite all the benefits they offer, studies reveal that only 28 percent of families who expect their kids to attend college plan to use a tax-advantaged 529 savings program to save. Other research similarly shows that families are more likely to use traditional savings accounts, which offer no tax benefit and low interest rates, rather than a 529 plan.

If you haven't considered a 529 for your college savings plan, you may be missing out. A 529 plan is a great option to save for college because it offers significant tax benefits, allowing your investments to grow tax-free and providing tax-free withdrawals for qualified education expenses. It has high contribution limits and offers flexibility in how the funds can be used, including for tuition, room, supplies, and other educational costs.