There’s been some talk during the current presidential campaign about making public colleges tuition-free. It makes a good soundbite but it’s not going to happen anytime soon. College tuition will remain the second largest personal expense after one’s home. That’s the bad news. The good news is that there’s a simple, low-cost, tax-deferred way to save for college: the 529 Plan.
Named after a section of the IRS code, 529 Plans were introduced in 1996 and held $253 billion in savings at year-end 2015.
Their popularity is due to their simplicity and flexibility. 529 Plans are available from a wide range of mutual fund companies, insurance firms, and brokerage houses. The application is straightforward and brief. The account value grows tax-deferred from the moment a contribution is made until it’s withdrawn. Qualified withdrawals are actually tax-free and are not limited to four-year universities but also include community colleges, technical and vocational schools, as well as part-time and night-school studies. The money can be used by anyone you designate as beneficiary (including yourself).
As with most investing strategies, 529 Plans should be established as early as possible in order to reap maximum benefit from the tax deferral as well as compounding of returns.
Most parents wait until the birth of a child to begin saving, but some prospective couples have opened 529 accounts for unborn children by naming themselves as beneficiary and changing it when the child is born.
Every family’s situation is unique, so we encourage you to contact us with specific questions about how best to save for your children’s or grandchildren’s education.