529 college savings plans
One expense in particular continues to outpace inflation at a significant clip: higher education. As a parent of two young children, this naturally creates a sense of anxiety. I’m often thinking about the cost of college (e.g., what can I afford to save, what vehicle to invest college savings in, what will college cost in 15 years). This planning often accompanies retirement planning and where to put an extra dollar between a Roth IRA and a 529 college savings plan. Read on to better understand the benefits and drawbacks of a 529 plan - a tax-advantaged investment account designed to save for education expenses.
Benefits of a 529 plan:
Tax advantages: Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Some states also offer tax deductions or credits for contributions to 529 plans.
Flexibility: 529 plans can be used for qualified expenses at any accredited college, university, or vocational school. $10,000 per year can be used for private elementary, middle, or high school.
High contribution limits: Many 529 plans allow account owners to contribute up to hundreds of thousands of dollars per beneficiary, and there are no income limitations on contributions.
Increased portability: Beginning in 2024, the SECURE Act 2.0 gives a 529 plan beneficiary the ability to transfer 529 plan funds into their own Roth IRA without paying taxes or penalties. The 529 plan must have been open for a minimum of 15 years.
Drawbacks of a 529 plan:
Limited investment options: Most 529 plans offer a limited selection of investment options, which may not meet the needs or preferences of all investors.
Penalties for non-education withdrawals: If you withdraw money from a 529 plan for non-education purposes, you will incur taxes and a 10% penalty on the earnings portion of the withdrawal.
Impact on financial aid: The assets in a 529 plan are considered when determining a student's eligibility for financial aid, which could potentially reduce the amount of aid the student receives.