Across the nation, more than 4 million teens will graduate high school this spring, according to the most recent figures from the Census Bureau, and many of them will go straight to college this fall. And among their parents, those who've prepared in advance for the financial burden ahead will likely be able to attest to the value of college savings plans, particularly 529 plans.
The number 529 refers to the section of the Internal Revenue Code that allows these tax-advantaged plans. It also has inspired states and others to promote 529 College Savings Day on May 29. In recognition of that, here are four reasons why 529 plans are worth considering for your education savings needs.
1. There Are Great Tax Advantages
Ordinarily, when you save money for a long-term financial goal, you have to pay taxes on the investment income it generates. Further, when you sell your investments in order to raise cash to make payments, you'll typically owe even more tax on the capital gains on those investments.
Investments in 529 plans, however, build up on a tax-deferred basis, meaning that even if the investments you select pay interest, dividends or other forms of income, you won't have an immediate tax bill. More importantly, if you use 529 plan money for qualifying educational expenses -- including tuition, required fees, and even room and board for those students who are enrolled at least half-time in college -- then those withdrawals become tax-free. The earlier you start saving for college, the more those tax advantages add up.
2. You Can Make Huge Contributions
Some options for college savings have very limited contribution limits. For instance, Coverdell Education Savings Accounts have many of the same tax advantages as 529 plans, but they only allow you to contribute $2,000 annually toward a child's college education.
Limits for most 529 plans, however, are much higher. Each state's plan has a different maximum account value, from around $235,000 to as high as $400,000. That gives most families all the flexibility they need to save for their children's college education.
3. They Have Financial Aid Advantages
Many parents neglect to consider the impact of their savings decisions on financial aid awards. For instance, if you open a custodial account in your child's name, those assets are considered the property of the child, and financial aid awards will take a greater percentage of those assets into account, potentially lowering how much aid you get .
By contrast, even though 529 plans are held for a specific student beneficiary, they're treated for financial aid purposes as property of the parent as long as the parent is the named owner of the 529 plan account. A much smaller percentage of parents' property is included in the expected family contribution toward college costs, and so using 529 plans wisely can boost your financial aid.
4. They've Gotten Better -- And Cheaper
Over the years, 529 plans have evolved. In the past, limited investment options with high fees made 529 plans a somewhat less attractive option.
%VIRTUAL-article-sponsoredlinks%But now, many of the most popular plans extensively use index mutual funds and other low-cost investments as their primary savings vehicles, and that leaves more money for you and your child to use for college costs. In addition, with target-date funds that automatically invest less aggressively as your child's college start-date approaches, you can save for college without constantly worrying about whether to make your own adjustments to your investing approach.
It's important to remember that there's no requirement that you use the 529 plan that your own state offers. In some cases, your state will offer state-tax incentives to participate. But it's often worth looking outside your home state for the best deal.
529 Plans: 4 Reasons They're Great; 1 Day to Consider Them
What's going to give you more pleasure –- a new flat-screen TV or an out-of-the-country trip with friends or family? I've learned to choose experiences and memories over designer goods and technology.
This is a standard lesson. It's never too early to start saving for retirement. Start putting away small amounts monthly into a Roth Individual Retirement Account today, and automatically to set yourself up for success tomorrow.
Nobody will look out for you like you look out for you. If you want something, be proactive. Work for it, ask for it and make a plan to get there.
Whether you're giving your time or your earnings, donating in service to others provides opportunity for connection, growth and learning -- and it can be downright humbling.
It's up to you to decide if it's for better or worse. But communication is key and money should be handled by both of you together, not handed off to one partner.
Student loans are a lot more manageable if you start dealing with the accruing interest while you're in college. This will help keep your payments lower, and ensure that you're putting a bigger chunk towards principal upon graduation.
In the event of a car accident, having the right documents and insurance in place will make it easier on you, your family and your loved ones.
Having a savings account to handle surgeries, object removals and stitches can save your credit card the burden.
Check your score annually using a website like annualcreditreport.com and make note of steps you can take to improve it.
Whether it's for bill payments, financial deadlines, interviews or travel. Plan to show up or pay early. This adds an extra layer of time protection against unforeseen circumstances, and it prevents late fees, change fees and just plain looking bad.
Learn to use credit wisely. Don't carry a balance on credit cards unless you understand the true cost of the interest.
Whether it's a new job, an upgraded car, some type of advanced technology or a consulting fee, do your research and know where the market is priced. Look online for rates, discounts (for products) and don't be afraid to ask to be paid more or to pay less. The worst that can happen is you'll be told "no." The best that can happen is that you'll earn or save more.
Don't pretend to understand something if you don't, and don't ever sign a contract without reading it in full. Educate yourself on the ramifications of any financial decision or contract you plan to enter into.
This is just a fact of life, and why I subscribe to the lifelong learning model.
When it comes to money, all work and no play makes it hard to stay motivated on the road to financial freedom. Taking time to celebrate the small wins along the way makes the journey much more enjoyable.
Quantifying goals -- by making them Specific, Measurable, Attainable, Relevant and Timely -- helps to keep you accountable and invested in your progress.