What are the benefits of a 529 plan?
While the obvious cost savings for tuition is the primary reason parents start a 529 plan, the tax incentives for the contributor can’t be overlooked. As an individual, you can contribute up to 15K towards this endeavor, and 30k if married — which can dramatically reduce your tax liability. You can also contribute 75k and 150k, respectively, for the single and married taxpayer in a single year without eating at your lifetime gift-tax exemption.
When should you start a 529 plan?
With many new parents turning baby shower gifts into college savings, it’s safe to say it’s never too early to start saving for your children’s education.
Let's say that you want to have $25,000 saved for your child to use for college expenses once they turn 18. For this example, let's expect an average annualized return of 7% on your investments.
If you start saving when your child is born, you can easily set aside $56/month, or $669 annually, to meet your goal. As time passes, the more you'll have to save on a monthly basis to reach that goal. So if you start saving when your child is 10 years old, you'll now have to save $175/month, or $2,100 annually, to meet the same goal.
While there's never a perfect time to start saving for college, the key is to avoid procrastinating and open a 529 plan as early as possible. Plus, most 529 plans have very small or no initial contribution requirements and don’t require monthly contributions.
Who can contribute to a 529 plan?
Anyone, with any income, at any time, can open a 529 account. If you’re a U.S. citizen/resident alien and at least 18 years old, there are no income requirements or contribution limits. And the neat part about this type of savings plan is that you don't have to go at it alone. Relatives of the beneficiaries can contribute and participate in the tax benefits per the IRS regulations.
From calculators to infographics, there are many online tools available to help you determine how much to save in your 529 plan, but having the expert help of a financial planner can also help you understand how this type of savings plan fits into your overall financial plan.
Financial advice for real people, by real people. You shouldn't need a degree to understand your money. Join Head of Education, Brittney Castro and Altruist mentors as they break down financial tips and strategies in a real way to help you finally understand how to achieve your financial goals faster.
Have a question you want to see answered? Ask it here. 🙋♀️