529 Plan: 5 reasons you should have one (or more)

Let's talk 529 plans.

If you have or plan to have children, then you should know about 529 plans and have one for each child. 529 plans are state (or institution) sponsored tax advantaged savings accounts that encourage saving for future education costs (source: sec.gov). 

Higher learning is EXPENSIVE! Wouldn't it have been a blessing if you had funds from a 529 plan to put towards or completely cover the cost of your education?! 

Student loan debt is a huge burden that has far reaching impacts on the futures of borrowers. The effects can seem all encompassing; affecting the jobs you take, the ability to move out of your childhood home, own a home of your own, or start a family. 

According to educationdata.org, "the average federal student loan debt is $37,574 per borrower, [while] private student loan debt averages $54,921... [and] 20 years after entering school, half of the student borrowers still owe $20,000..." - sobering statistics for the bright-eyed, bushy tailed new graduate. 

So, back to the 529 plan. Let's look at 5 reasons you should have one for each of your children to ease or eliminate the burden of student loan debt.

1. It grows with your child. You can open a 529 plan as soon as your child is born. Set up automatic deductions from your paycheck and/or contribute monetary gifts from birthdays and holidays. 

I'm writing this in my home state of Pennsylvania, where Keystone Scholars gifts you $100 to open a 529 plan for your child(ren)! Check out this CNN article to see if your state does the same.

2. Others can contribute. If your 529 plan is administered by Ascensus, you will have access to ugift, a service that provides a unique link where loved ones can contribute directly to your 529 plan. 

You will be equipped with an excellent suggestion when someone asks what to gift! And with a boost from compound interest, a 529 plan contribution could be the gift that keeps on giving. 

3. It's tax advantaged. You will have pre-set investment options such as mutual funds or exchange traded funds (ETFs) within the 529 plan. While tax benefits can vary by state, you will likely be able to deduct contributions from state income tax. 

As long as 529 fund withdrawals are used for qualified higher educational expenses or tuition at elementary or secondary schools, then earnings are not subject to federal income tax (and most likely) state income tax (source: sec.gov). Very few savings accounts allow tax-free growth AND withdrawals!

4. It can be transferred to another family member. So what if your child decides not to pursue higher education? There are options. 529 plan funds can be used for registered technical schools or apprenticeship programs, or to pay for peripheral learning expenses (books, computers, etc.). 

The account owner (YOU) can name a new beneficiary as long as he or she is a qualified family member: parent, sibling, child, first cousin, niece, nephew, etc. (source: betterinvesting.org). 

You may use 529 plan funds for non-qualified expenses, but the earnings are subject to income taxes and withdrawal penalties. Learn more about penalties for non-qualified expenses here.

5. It can be rolled over into a different account.  This is new! Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 ACT, starting in 2024, 529 plan beneficiaries can rollover $35,000 to a ROTH IRA tax-free! (source: money.usnews.com) 

Annual contribution limits apply and the account must be at least 15 years old to take advantage of this benefit. The rollover can only be made for the 529 plan beneficiary NOT the account owner. AND changing the name of the beneficiary may restart the 15 year clock, so be sure to confirm BEFORE making any changes to your 529 plan! 

This post should only serve as an introduction to 529 plans, and trigger more targeted research to the specific plans available to you. Familiarize yourself with any account maintenance fees, impacts on financial aid eligibility, different investment options, minimum automatic contribution amounts and restrictions on withdrawals and rollovers if applicable. 

So, friends, what are you waiting for? As a parent, you are absolutely NOT obligated to cover the cost of your child(ren)'s future education. In fact, I recommend you contribute to and max out retirement contributions for you (and your partner) first. That's another way to avoid a potential future burden on your kids! 

But, what an awesome gift a 529 plan could be if you can afford to fund it, and there's no reason you can't afford it! With zero cost (and a potential gifted contribution) to get started, what do you have to lose? You don't have to have a whopping amount to fund a 529 plan. 

Oftentimes, we want this grand gesture or windfall winnings, when we'd be much better off taking control of our future little by little. Take advantage of compounding interest by starting with what you can as soon as you can (preferably when your child is born, but it's not too late if you have a toddler or teenager). Very few accounts have tax benefits to growing and withdrawing. Open a 529 plan and start funding the future TODAY!

Did you know about 529 Plans? Do you have one for your child(ren)? Let me know in the comments!

If a 529 plan is a new concept to you, then here are your action steps:

1. learn more about 529 plan options in YOUR state.

2. Open a 529 plan and start funding it!

3. Make a plan to contribute to your 529 savings account on an ongoing basis, and invite others to do the same. 

**This post does not contain affiliate links, nor is it a sponsored post.