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The Bend Magazine

5 Benefits of 529 Plans

07/18/2019 03:48PM
It’s no secret that the cost of higher education is increasing every single year. We can only imagine what tuition costs will be in 15-20 years for parents with young children, like myself. If you plan to send your child to college, one of the most important and beneficial things you can do is start saving now with a 529 plan. Like a financial advisor should, I opened a 529 account for my daughter as soon as she had a birth date and social security number. I was literally filling out the account paperwork in the hospital just hours after she came into the world. In my overwhelmed-new-father state of mind, I didn’t realize SSN’s weren’t issued at the same time as DOB’s… 

1. Tax-free growth

529 plans are state sponsored investment accounts that provide favorable tax treatment for college savings. Although contributions aren’t deductible, the investments grow federal tax-free as long as the funds are used to pay for qualified education expenses. The illustration below shows the benefit of tax-free growth.

Figure 1:This hypothetical illustration assumes an initial investment of $10,000 and a 5% annual rate of return. The taxable account assumes a 28% federal tax rate. The illustration does not represent the performance of any specific account or investment and does not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower. (1)

Here in Texas, we’re blessed with no state income taxes, but some other state’s 529 plans also offer state income tax deductions and credits for contributions. 

2. You remain in control of the assets

You can open a 529 plan for your child, grandchild, niece or nephew, etc. and you will still be considered the owner. If the named beneficiary ends up not going to college or not needing the funds, the plan can be transferred to another beneficiary. Other college savings plans list the beneficiary (child) as the owner of the account, which can be bad news if the child isn’t mature enough to handle those assets when they reach legal age. (2)

3. More than just college tuition

Qualified education expenses include tuition, books, and living expenses for college or similar post-secondary institution like tech and vocational schools. In addition to that, the IRS now allows you to withdrawal up to $10,000 per year for private, public, and religious K-12 schools. (3)

4. 529 plan contributions make the perfect gifts

If your child or grandchild is anything like ours, they most likely already have WAY too many toys. When family and friends ask us what to get our daughter for her birthday or Christmas, I say “check payable to…” Grandparents, Aunts, Uncles, and other family members take a lot of pride in helping fund an education. It may sound cliché, but it really is the gift that keeps on giving.

5. Golden lessons

Teaching children and young adults the discipline and benefits of investing is the most important and meaningful benefit of a 529 plan, in my opinion. I plan to review the 529 plan with my daughter each year as she grows up so that she can see what a disciplined investment strategy can produce and reap the rewards firsthand when she attends college. 

The world of 529 plans can be very complex. Each state’s plan has different structures and benefits, so it is important to shop around to determine the best fit. I highly recommend consulting with a financial advisor before selecting a plan. Feel free to contact me and I would be happy to point you in the right direction.

Travis S. Cruger
Investment Adviser Representative
https://www.facebook.com/TravisCrugerIAR
Securities and investment advisory services are offered through NEXT Financial Group, Inc., member FINRA/SIPC
Cruger Financial Services is not an affiliate of NEXT Financial Group, Inc.
Opinions expressed in this article may not reflect the views or opinions of NEXT Financial.

Sources:
https://www.lonestar529.com/learn/tax-incentives
https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html
https://www.irs.gov/pub/irs-pdf/p970.pdf