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
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.