Today CERTIFIED FINANCIAL PLANNER ™, J.J. Montanaro joins us to talk about the 529 College Savings Plan.
Tara: What is a 529 College Savings Plan? Why would I want one?
JJ: A great way to save for college! The 529 got its name because of the special tax benefits it offers that are laid out in Section 529 of the tax code. You might want one to take advantage of those tax benefits while saving money for your children’s college so that you (or they) don’t have a lot of debt when they graduate.
Tara: Are there different types? What is the difference?
JJ: There are two main types of 529 plans. First, there are college savings plans where you invest and accumulate money within the plan, kind of like how a 401(k) works. Second, there are prepaid tuition plans where you buy tuition credits at today’s prices for later use. As far as 529 college savings plans go, there are many different plans out there and they can vary dramatically in terms of cost, investment offerings, and contribution limits. Research as to what’s best for you, is definitely in order.
Tara: Does the 529 affect financial aid?
JJ: 529 savings plans owned by either the parent or the dependent student are considered parental assets when you fill out the Federal financial aid application. This means they have less of an impact than assets in the student’s name like assets in an UGMA/UTMA account.
Tara: Are there additional tax benefits of a 529?
JJ: I believe the biggest benefit is that your savings is tax-deferred and withdrawals for qualified education expenses are tax-free. Beyond that, some states offer state income tax benefits for folks that contribute to a 529 plan. Check with your state’s revenue department to learn more.
Tara: Does it matter what school is attended? (in-state or out-of-state)
JJ: 529 savings plans can be used in or out of state. Typically, prepaid tuition plans are set up to most benefit those that attend school in a particular state. Although even with prepaid plans there are typically options for out of state use.
Tara: How do I know that a 529 is the best route for our family?
JJ: If your savings is specifically for college, a 529 is definitely worth exploring. One of the 529’s features is the ability to change beneficiaries. For example if you save money for one of your children, but instead decide to transfer and use the Post-9/11 GI Bill for her, you could transfer the money and make a younger child the beneficiary.
Tara: How do I pick the best 529 plan?
JJ: That’s kind of like standing in a closet full of wonderful dresses and asking, “which dress should I wear?” The reality is that you want one that fits and that you like. There are plenty of options available, so shop, shop, shop!
Tara: Where can I go to see what 529’s are available?
JJ: To compare plans from across the country visit the website SavingForCollege.com.
For more articles and advice by J.J. Montanaro, please visit AskUSAA.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.
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