Education Savings: All About 529’s

Last week’s episode probably got you thinking about saving for education expenses. Starting early can make paying for an Ivy League college for your budding genius a reality. Now that we’ve established the ‘why’ of education savings, this week we talk about the ‘how’ to plan for education expenses. The bottom line is to use 529 plans. Sure, you could funnel money into your brokerage accounts and earmark it for education, but then you miss out on the substantial tax benefits that accompany 529 plans (similar to 401K’s and HSA’s). Any contributions you make to a 529 account grow tax-free, meaning that the capital gains interest in dividends you earn from growth is all tax free. Then, when you make withdrawals to spend on qualified education expenses, those are also tax-free. So once you put the money in, it's all tax free when you use it for qualified education expenses. Listen in to hear Matt Robison and I talk all about the in’s and out’s of 529’s. Beneficiary Flexibility: 529’s offer the option to change beneficiaries at any time. You can set up an account now for an unborn child, grandchild, niece, nephew, etc. If one beneficiary doesn’t need the funds or use the entire balance of the account, you can switch the account holder to another child or to yourself. Multiple Accounts: While 529’s provide flexibility in beneficiaries, you will still want to establish multiple plans for multiple children as they may overlap in spending plus there are contribution limits per beneficiary, per year.Do Your Homework: Each state offers a different 529 plan with different benefits. Start with your own state and begin by assessing tax deductions. If they aren’t great, look at other states’ plans for things like low cost funds, better investment options, account fees, portfolio management fees, program manager fees, state fees and the fund fees. Spoiler alert: Illinois and Utah have two of my favorite funds.Set-it-and-forget-it: Invest in low cost index funds or age based index funds during your initial set-up so that all future contributions go directly into that fund. Spending from your 529: Sure, you can spend money from the fund on things like tuition and fees, books, computer technology etc. But did you know you can also use it for Kindergarten through high school? Distributions are capped at $10,000 a year, but you can use the account as a pass through for tax deductions (put money in then take it right back out to pay for education). It can also be used for student loan repayment up to $10,000.Leftovers: There are many ways to spend the money in the 529 but if you find yourself with leftover funds, you can pass that on to related family members, or use it on yourself! Have no one left in your life with qualified education expenses? You can still access that money and use it on non-qualified expenses. You'll pay a 10% penalty on any of the growth and you'll have to pay taxes. No one I know has ever complained about extra money leftover.Hopefully after last week’s episode and this week’s breakdown of 529’s, you are feeling more confident about your education savings plan.Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/Are you ready to create your ideal lifestyle? Let’s Connect.