Back-to-school season is upon us. The commercials flood your televisions touting deals and discounts for school supplies and fresh new fashions in anticipation of fall’s approach. If you’re heading off to college, you’re probably anxious and excited. If you have kids of your own, then one day you’ll be the one to make sure they’re well prepared and have everything they need. I’m not just talking about books and dorm room decorations. A solid plan to pay for school tuition, fees, and supplies is essential. Whether you’re a parent of a newborn or a graduate student yourself, now is the perfect time to take advantage of a college savings account called the 529.
What is a 529 account?
A 529 account is a college savings account that can be used for tuition, books, and other related expenses. It can be used at most accredited colleges, universities, vocational-technical schools, and even eligible foreign educational institutions. Any U.S. resident aged 18 years or older can invest in a state 529 plan. A beneficiary can also be assigned to an account, meaning that if your relatives want to open or contribute to your college savings, they can do so on your behalf. Not only will your college savings grow tax-free, but in some states your contributions will also be tax-deductible. That means even those who are already in college could get a tax break by paying for tuition through a college savings account.
If you’re in school
Ready to open up your very own 529 account? You’ll want to first check that your school is eligible. Then, check to see if your state offers these great tax deductions for 529 contributions. When you sign up, be sure you are both the account owner and beneficiary, unless you are opening the 529 plan on behalf of another person. Now add some money to the account! Try to contribute the maximum amount that is tax-deductible in your state to get the most out of your tax yearly deduction (don’t forget to claim your contributions on your tax return!).
If you have a college-bound kid
If you’re opening the account for a child, start with what you can. Try the world’s simplest college cost calculator to see what it will take to fully fund your kiddo’s college costs. Some plans will allow you to set up an automatic monthly contribution. Even small amounts over time will add up. If your child doesn’t go to college, you can change the beneficiary of the account to another child, or even yourself for a course of study at a qualified accredited college.
Accessing your savings
Once it’s time to use your college savings, request a qualified withdrawal. Your withdrawal can go directly to your tuition or to your education expenses, like books, supplies, room and board, etc.
All 529 plans are not equal, so it's wise to compare and weigh all your options in your state of residence. When you've made your decision, get ready to make saving for college easier and reap the tax benefits, too!
Kristen Euretig, CFP®, owns Brooklyn Plans, LLC a financial planning firm dedicated to helping today’s women.