If you’re considering financing your college education with the help of a student loan, the smartest thing you can do for yourself is to only borrow what you truly need. (This advice applies to pretty much all loan products, by…
Knowing what’s best for your children isn’t always easy. Especially when it comes to planning for their future.
Exploring how to save for your children’s college education can be one of those parenting quandaries: How do you know what’s the best savings strategy for your family?
A 529 college savings plan is one avenue worth considering. Often state-sponsored, a 529 plan is an investment account that allows you to save for future qualified education expenses.
In honor of 529 College Savings Day, here’s a look at how the accounts work—and what you can do when life happens and plans change.
How 529 plans work and what to do if plans change
The funds can offer tax benefits.
Saving through a 529 plan can offer tax savings, according to the College Savings Iowa 529 Plan:
- Your earnings might be able to grow federally tax-deferred.
- Qualified withdrawals are tax-free.
- Some states offer other tax benefits as well.
Like other investment strategies, the sooner you start saving, the more time your savings can potentially grow.
You can change the beneficiary.
When you open a 529 plan, you designate a beneficiary of those funds. But what if the beneficiary receives a full-ride scholarship or skips college?
With college savings plans, you the accountholder remain in control of the funds, so you can change the beneficiary to another qualified one at any time, according to College Savings Iowa. Eligible family members include the original beneficiary’s:
- Parents (That means you can further your education, too!)
You can save in one combined account.
Because the beneficiary can easily change, you also have the option to create one 529 plan to use for all of your children.
Here’s how that might look:
Say you have three children. You open one 529 plan under the name of your oldest child. As child no. 1 attends college, you withdraw and use his share of the savings. As child no. 2 begins college, you make her the account’s beneficiary. You repeat the process for child no. 3.
It’s one way a family can simplify the college saving process.
Use it for other education-related expenses.
Thanks to legislation that took effect in 2018, you have even more freedom in how to use the savings. This can be particularly useful if you suspect the money won’t be needed for college.
You can now use up to $10,000 per year per beneficiary toward a student’s private or religious K-12 school tuition, according to College Savings Iowa. Qualified education expenses also can be used at postsecondary trade and vocational schools, two- and four-year colleges and postgraduate programs.
Qualified higher-education expenses include:
- Room and board
- Computer hardware and software
- Internet access and related services and required supplies
You can withdraw the funds.
If your original beneficiary can’t use the savings—and you don’t have another qualified beneficiary—you still have a couple of options:
- Stay the course. Children can change their mind. Maybe down the road, college will become part of the plan. Meantime, your 529 benefits don’t expire by a certain date.
- Withdraw the funds for unqualified expenses. If education expenses aren’t in the cards, you can still withdraw your savings to use how you wish. You’ll pay federal and state income taxes and a 10-percent federal penalty on the earnings, according to College Savings Iowa. You won’t pay penalties on your investment itself.
The 529 plan is one piece of the puzzle.
When feasible, saving for your children’s college education can be a wonderful gift. At the same time, you don’t want to jeopardize other financial goals like retirement.
Because everyone’s financial situation and goals are unique, working with a trusted financial planner can help you prioritize your financial goals to allocate your funds accordingly. In the end, it’s a balancing act.