Why You Should Invest in a 529 College Savings Account

Financial planning for college involves looking at every possible option for making sure that your loved one is able to afford to enroll in their preferred degree program. While most people are familiar with grants and loans, there is another option for funding college that often gets overlooked. A 529 college savings account offers tax advantages that help you to make each dollar you save go further. Plus, opening up one of these savings accounts offers you these benefits that make it worth the investment.

Enjoy Tax-Free Growth for College Funds

Your contributions to the fund aren’t qualified as tax deductions. However, once you put the after-taxed money into the funds, it will grow tax-free. Then, when you or the beneficiary withdraws the money for qualified education expenses, the gains won’t be taxed, either. Keep in mind that you’ll want to make sure that you are using the gains for expenses that fit the guidelines for a 529 plan. If you don’t, then you could face penalties.

Expand Your Investment Options

Are you a bit disappointed by the slow growth you see in the funds you place in savings accounts at your bank? If so, then a 529 plan can potentially open up more options for you to enjoy high-yield investment opportunities. This is one benefit that can vary according to which state you reside within, so you’ll want to do your homework. However, you may be able to invest in stock funds that can give you a bigger return on your contributions. Given the current level of skyrocketing tuition, being able to keep your savings growth at a similar rate could help you make college more affordable.

Utilize Higher Contribution Limits

Other types of savings plans often stifle account holders by setting limits on contributions. While a 529 plan also has limits, they tend to be higher than what you can face with other types of savings accounts. Once again, the contribution limit can vary according to the state you live in, but you’ll typically be able to invest anywhere from 235,000 to 529,000 over the course of a lifetime. If you’ve got a beneficiary that anticipates high college funding needs, then you’ll find being unrestrained on your contributions helps you to build a fuller account for them.

Retain Control Over the Account

Some savings plans allow a beneficiary to take control over the funds once they reach the age to do so legally. A 529 plan works differently by allowing the account holder to retain full control over the funds until they are withdrawn. If you have a financial need, then you can withdraw funds provided that you accept the tax penalties. You can also choose to add or remove a beneficiary if things change, such as if you have another grandchild who wants to go to college after the first one graduates.

Use the Plan to Pay Off Student Loans

In 2019, the SECURE Act expanded the benefits of 529 savings plans to include being able to use the funds to cover the cost of student loans. Currently, you can use the funds to pay up to $10,000 of the beneficiary’s student loans. To maximize the benefits, you can also use your account to cover the same amount for each of the beneficiary’s siblings’ student loans, which is wonderful if you have multiple children who had to borrow funds for their education.

Saving money for a child’s college education is a rite of passage that many parents have gone through over the years. While parents used to be able to save enough to cover the majority of their child’s education in the past, it often still feels like just a drop in the bucket in the face of rising tuition costs. Using a 529 college savings account for the tax-free benefits and the ability to boost the funds through high-return investments helps to reduce your beneficiary’s reliance on student loans.