529 plans
I am not a financial advisor by trade, but I do follow several people who specialize in this area, since I do field questions from families about whether or not to set up a 529 college savings plan. With a 529 account, you can invest in high-return assets like stock funds and avoid capital gains taxes while building earnings. And withdrawals are tax-free if you use the money to pay for qualified education expenses. Thirty states even offer additional tax breaks on your contributions to sweeten the deal. Here are some things to know:
1. 529 accounts pay for education expenses only. Withdrawals from 529 plans must be used for qualified educational expenses, such as tuition, books, and room and board. If you withdraw funds from a 529 for non-qualified educational expenses, you'll typically face income tax on the earnings portion of the withdrawal and a 10% penalty on the earnings.
2. One-third of all high school graduates don’t go to college as a next step in life. In such a case, there are some options if the named beneficiary can’t use the money in a 529. But if you liquidate these funds and use them for another purpose other than college, there may be penalties and a large tax bill.
3. Like other savings accounts, 529 plans must be reported on the Federal Application for Free Student Aid (FAFSA), which considers the value of a family's assets when calculating how much the household is expected to contribute to a student’s college expenses.
4. Don’t expect to buy and sell individual stocks in your 529 plan. These plans typically invest in stock funds, bond funds, money-market accounts, and target-date funds based on the year you’ll start paying for college.
5. Contrary to popular myth, you do not have to attend college in the same state as your 529 plan. This is great news for students who wish to keep out-of-state options on the table as they decide where to attend college.
If you'd like to learn more about preparing for college, applying to colleges, and paying for college, please use the contact form on my website to reach out!
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