It’s 529 Day: 3 Reasons to Open a 529 Plan

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There are many benefits to opening a 529 plan. Read on to learn about a few of them. 

If the idea of having to put your kids through college is enough to induce panic, you’re no doubt in good company. The average cost of tuition and fees at an in-state public college was $10,423 for the 2022-2023 academic year, according to U.S. News & World Report. And in-state college might be your cheapest option.

For out-of-state colleges, the average cost this past academic year was $22,953. And for private colleges, it was $39,723.

Now, there are different options you can look at when it comes to saving for college. One is to put your money into a regular savings account. But going this route might lead to minimal growth over time.

You could also save for college in a regular brokerage account. This way, you get complete flexibility with the money you invest.

But you may find that a 529 plan is a much better home for your college savings. Here’s why.

1. You can enjoy tax-free growth on your money

If you keep your college fund in a savings account, the interest you earn on it will be subject to taxes. And if you invest your college fund in a regular brokerage account, any gains in that account will be taxable as well.

With a 529 plan, you’re not required to pay taxes on your investment gains provided you use the money for qualifying education expenses. So, let’s say you contribute $40,000 to a 529 plan, but over time, your balance grows to $80,000. That’s $40,000 in gains you can avoid paying taxes on if you use that money for its intended purpose.

2. You get the flexibility to change beneficiaries

You might assume that all of your kids will go to college, or that they’ll all choose expensive schools. But what if your oldest opts out of college and decides to start their own business instead? And what if your middle child decides they’ll go to community college, thereby saving a bunch of money on costs?

In that case, you’re not doomed. 529 plans let you change beneficiaries without a hassle.

So if you have $50,000 earmarked for your oldest child’s education and they decide not to go to college, you can reserve that money for a younger child and designate them as the beneficiary. Similarly, if you have $50,000 for another child of yours to attend college and their education only ends up costing you $40,000, the remaining $10,000 can go to a younger child.

In fact, you don’t even have to use the money in your 529 for your kids. You can designate a niece or nephew as a beneficiary, or use the money to go back to school yourself.

3. You can use the money for private education for grades K-12

It used to be that a 529 plan could only be used for higher education. But the rules changed a few years back, and now, you can take withdrawals to cover private school tuition for grades K-12. So if your child decides they really want to go to a specialty high school, you’ll have the option to dip into your 529.

Granted, if you raid your 529 plan for elementary, middle, or high school education, you’ll have that much less money left over for college. But still, that’s a choice you get to make.

All told, there are plenty of good reasons to save in a 529 plan. You don’t necessarily have to make it your only college savings option, but you should at least consider putting some money into one of these accounts.

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