Having a kid is great, isn't it?
Another human life that you created can bring so much joy to one's life.
But it also brings a whole lot of worries and concerns. And one of those is always college. Specifically, how you are going to pay for your kid to go to college.
There are many ways you can go about saving money for your child's future education, and one great option is the 529 plan.
A 529 plan has tons of great tax benefits, and it is never too early to start one.
If you've never heard of the 529 plan, here is a quick explanation of what it is and some benefits to starting one.
A 529 plan, named after section 529 of the IRS Tax Code, is a specialized savings account for college or k-12 tuition.
Each 529 account has an owner who controls investments and selects a beneficiary. The beneficiary can be the same person as the owner and can be changed.
The way it works is essentially the owner creates and puts money into an account, which can be used later for eligible school expenses.
Eligible expenses include:
● Mandatory fees
● Room and board
After the account is made, the owner or anyone can continue to make contributions.
There are two main types of 529 plans: College savings plans and prepaid tuition plans.
The college saving plan is the more popular option and works very much like a 401k.
Essentially, you invest your after-tax contributions into mutual funds or similar investments. Your account then goes either up or down, depending on how the market and your investments perform.
With the prepaid tuition plan, you pay for tuition credits at today's prices. So you aren't actually investing, rather paying in advance, hopefully for at a lower price.
You typically will pay in-state public college education prices, but these can be converted for use at out of state and private colleges.
There is also a Private College 529 plan, which is sponsored by more than 250 private schools.
So you may be wondering, "Why would I put my money in a 529 plan? Why not just put it in a normal bank account or investment?"
That's because there are a lot of tax-based benefits to using a 529 plan.
Once money is put into a 529 account, it grows tax-free. Your money also won't be taxed when taken out for school eligible expenses.
The same can't be said for other accounts and saving vehicles.
For example, mutual funds give up a portion of their earnings to annual income taxes and also get hit with a capital gains tax at withdrawal.
Many states offer additional tax benefits for 529 plans.
Currently, over 30 states offer a full or partial tax deduction or credit for 529 contributions.
You can generally claim state tax benefits each year you contribute to your 529 plan, so it's a smart idea to continue to keep making deposits until you've paid your last tuition bill.
Contributions to a 529 plan do not have to be reported on your federal tax return.
This means you won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
And in 2018, deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion.
Does a 529 plan sound like a good idea? Great!
If you need help finding a 529 plan, go to Savingforcollege.com!
They analyze plans across the country to find the best 529 plans for you and your family.