Navigating the Benefits of 529 College Savings Plans: What You Need to Know

Are you a parent or grandparent looking to save for a child’s education? Have you heard of 529 college savings plans? If not, you’re not alone. According to a recent survey, less than a third of Americans actively saving for a child’s education are aware of the existence of these tax-favored accounts.

529 college savings plans are a powerful tool in preparing financially for higher education. Similar to Roth IRAs, these plans are funded by after-tax contributions and distributed federally tax-free to cover qualified educational expenses. And recent developments have made them even more attractive, offering flexibility and alternatives if the child does not go to college or doesn’t use all the money.

State-sponsored college savings plans began in 1986 with the Michigan Education Trust, and Congress codified a tax preference in 1996 with legislation creating Section 529 of the Internal Revenue Code. Today, 49 states and the District of Columbia offer 529 savings plans, each with its own lifetime contribution limit.

One new feature of 529 plans is the ability to convert up to $35,000 of funds into a Roth IRA for the named beneficiary after the account has been open for 15 years. And while withdrawing the money outright may trigger a penalty and taxes on the growth, it’s not the end of the world.

When choosing a 529 plan, it’s important to consider costs, potential state tax breaks, and whether to open a plan directly or through an intermediary. Resources like Morningstar.com, collegesavings.org, and savingforcollege.com can help evaluate the options and compare plans.

With college costs on the rise and student loan debt at an all-time high, it’s more important than ever to start saving early for higher education. 529 college savings plans offer a tax-advantaged way to save for your child’s future. Don’t wait until it’s too late – start saving today and give your child the gift of a debt-free education.