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Getting the most out of a 529 Savings PlanSubmitted by Townsend Asset Management Corp. on August 14th, 2019
A college education does not come cheaply. Forbes has estimated that the price of a college education has increased 8 times faster than wages, making it a struggle for many families.
One way that families can save for their children's education is to set up 529 plans. A 529 plan is an investment account whereby participants make contributions using after-tax dollars. The earnings on the account are tax-free when the funds are used to pay for qualified education expenses. Funds in a 529 plan can be used for educational related expenses including tuition, room and board, books, as well as supplies such as computers and other equipment. Originally designed for college expenses, a change in the tax law passed in 2017 now allows 529 plans to be used to cover tuition and expenses for K-12 education, as well as tuition for both private and religious schools. 529 plan funds can also be used for vocational or trade schools.
There is no "use it or lose it" restriction on 529 plans, so if the plan funds are withdrawn and not used for educational purposes, plan holders pay taxes on any amounts earned through the plan as well as a 10% penalty. (Note, there can be some exceptions to the penalty.) There are no taxes paid on the original investment. For example, $20,000 has been contributed to a 529 plan, and the current plan balance is $25,000. If the entire amount is withdrawn for a non-educational related reason, taxes and a 10% penalty will be assessed on only the $5,000 of earnings. If the entire $25,000 is used for educational purposes, no taxes are assessed.
If you are considering opening a 529 plan, it’s best to start as early as possible, giving the plan maximum growth opportunity. Indeed, many parents are setting up a 529 plans upon the birth of their children. As always, contact your Financial Advisor to see if a 529 plan is right for your circumstances or if you have any questions.