Saving for college? The 529 plan is one of the most common college savings tools. Learn how a 529 plan can help you invest and save for higher education.
529 plan funds can grow federally tax-free when used for qualified expenses
The SECURE Act of 2019 expanded the list of qualified expenses, including apprenticeships and student loans
Contribute up to $75,000 all at once without paying the gift tax
It’s no secret that the cost of college has been on the rise. Depending on your course of study, it’s gone up quite a bit, a ton, or an astronomical amount. No matter how you slice it, college costs have outpaced inflation and wage growth.
But depending on which career path you and your loved ones choose to pursue, a college education is a near-necessity. Many careers require advanced degrees, and pretty much any skilled career requires vocational training and certification over and above a high school education.
If you’re concerned about covering the costs, one of the tools you can use to invest toward higher education is the 529 plan, which is a tax-advantaged investment account designed specifically to help cover education expenses.
So, what is a 529 plan? Read on to find out how the 529 might fit into your plan for saving for college.
A 529 plan is a tax-advantaged investment account designed to reward investors when they save for education expenses. On a federal tax level, you contribute after-tax money and your investments can grow tax-free as long as you withdraw money only for 529 plan qualified expenses. Plus, in some states, you can get a state income tax deduction (or even a credit) when you contribute to a 529 plan. Check your state’s specific 529 rules before filing your tax return.
Because your money is invested, you have the chance for it to grow over time. When you consider that college costs have been increasing faster than the rate of inflation, a 529 plan becomes more attractive because you can take advantage of potential compounding returns.
There are several potential benefits of a 529 plan:
There are some potential drawbacks to a 529 plan:
Investing in a 529 savings plan can go a long way toward helping you cover various expenses for your student. You can use the money for qualified expenses, such as:
The passage of the SECURE Act in December 2019 expanded 529 benefits to include fees, books, equipment, and supplies for certain apprenticeship programs. Also, under the SECURE Act, a 529 may be used to repay student loans—up to a $10,000 lifetime limit—for the 529 beneficiary and/or his or her siblings. (Check your plan to confirm if apprenticeships and student loan repayments are eligible.)
Depending on your situation, you can stretch your 529 dollars. First of all, if your child gets a scholarship, you can actually withdraw the scholarship amount from your 529 for nonqualified uses without paying the 10% penalty. You’re still required to pay taxes on the earnings portion of your withdrawal, but you avoid the penalty.
You can also take steps to ensure that your 529 dollars go further. For example, if your student starts at a community college, they can save money on tuition and other costs. Plus, if they live with you for part of their schooling, money from the 529 doesn’t have to be used for room and board.
If you decide a 529 plan is the way to go when investing toward college, don’t put your own financial future at risk. You’ll often hear: “There are loans for college; there are no loans for retirement.”
So consider setting money aside for other goals, like retirement, before putting too much money into a 529 plan. Think carefully about what’s likely to work best for you in the long run. Of course, it’s possible to save for multiple goals at once, but work toward meeting your own needs first.
The earlier you start investing in a 529 plan, the less you may need to set aside to help your student with their goals. By opening an account early and setting up a regular schedule of contributions, it’s possible to let potential compounding returns increase the chances that you’ll be able to help your child get through college with as little debt as possible.
An investor should consider a 529 plan’s investment objectives, risks, charges and expenses before investing. A plan’s Program Disclosure Statement, which contains this and more information, should be read carefully before investing. Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. This material is not an offer to sell or a solicitation of an offer to buy any securities. Any offer to sell units within the Plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.
TD Ameritrade does not provide tax advice. Every individual’s tax situation is different, and it is important to consult a qualified tax advisor regarding the application of the Plan’s benefits to your own individual situation.
Participation in the Plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses, or that a beneficiary will be admitted to or permitted to continue to attend an eligible educational institution.
Investments in 529 plans are not guaranteed or insured by the FDIC, SIPC or any other government agency, and are not deposits or other obligations of any depository institution. A donor may elect to treat a contribution to a beneficiary’s account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiary’s account of up to $75,000 (or up to twice that much if the donor and his or her spouse elect to “split” gifts) without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account (or any other gifts to the account beneficiary) during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return (Form 709) is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donor’s death will be includible in the donor’s estate for Federal estate tax purposes.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.