What is a 529 Savings Plan?

A 529 savings plan is one of the best tools you can use to save and invest for your child’s education. For parents such as me, I know we’re very interested and concerned about how we will afford future college education for our children. One of the best tools you can use to save and invest and see money grow for the future is with a 529 [college] savings plans.

Is a 529 Plan a Great Idea?

Now, there’s no doubt 529 plans are a great tool for any parent, really any parent of any income level to save for college, and 529 plans are typically coordinated by the state. When you compare the Coverdell ESA with a 529 plan, ESAs are coordinated on the federal level, and 529 plans are coordinated on the state level or by an educational institution.

How Does a 529 Savings Plan Work?

Now, almost every state offers 529 plans. And if you’re a fellow Georgia resident you actually have access to a pretty decent 529 plan called the Path2College Savings Plan and this is a great way to save for your child’s education. This is how my wife and I are saving for our kids. Even if your state doesn’t offer a 529 college savings plan, you can still open a 529 account in another state and use the funds in that account to pay for college tuition and approved fees at any school almost anywhere your 529 plan money can be used. And that also means internationally.

So, if you’re a resident of Florida, you can open a 529 plan in California and your child can go to college in Georgia and you can use the California 529 funds to pay for college. Be sure to confirm the college you or your child wants to go to is eligible for Title IV federal student aid. This is important to note.

Now, there are two types of 529 plans. The prepaid tuition plan and the college savings plan. For this post I’m only going to cover the college savings plan, because I personally don’t believe in prepaying anything when it comes to college and any service for that matter. If there is an interest in the other type of 529 plan let me know and I’ll make sure to cover it in a future post.

Do You Get a Tax Deduction with 529 Plans?

When it comes to tax deductions, 529 plans don’t offer any deductions on a federal level, but the earnings do grow tax free like a Coverdell ESA or Roth IRA, which is a great benefit if you’re able to start one of these plans when your child is very young.

Depending on what state you live in you may be eligible for a state tax deduction when you contribute to your state’s 529 plan. This could lower your state tax liability, meaning you keep more of your hard earned money. That’s a great thing to have whenever you can get any kind of deduction when you file your taxes.

Are There Income Limits for 529 Plans?

Now, another great advantage of the 529 plans is that there are no income limits. Pretty much! Anyone can open a 529 plan, unlike a Roth IRA or a Coverdell educational savings account, which has certain income restrictions.

So if you make $200,000 or $100,000 or $50,000 you can open up a 529 plan for your child. And that’s awesome because depending on your income level and you won’t have to worry about incomes restrictions when saving for the future of your child, especially knowing that they may go to college.

So make sure that you’re taking advantage of these college savings plans, whether it’s a 529 plan or a Coverdell ESA based on your income, because there are some benefits to having a Coverdell ESA that I will cover at a later time.

Should You Enroll in Your State’s 529 Plan?

Enrolling in a 529 plan is pretty easy. While investment choices can be limited, I still like the 529 plan if you’re able to get a state tax deduction. So what I would suggest first is check with your state. Before you invest in another state’s 529 plan, and then look at the investments within your state’s 529 plan.

So for example, within the Georgia 529 plan there are decent investment options, but they also give you that state tax deduction, which is a great benefit for me and my family and for many families out there who want to invest in a 529 college savings plan in the state of Georgia.

Are 529 Plans Only for College?

Now I know the title of this episode is 529 college savings plans. But I also want you to know that 529 plans can actually be used for any level of education, basically. There was an update under the president Trump administration on how you can use funds in the 529 plan. Now pay attention. You can use funds in the 529 plan for qualified quote expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school.

This is huge because you can now save even more for basically all levels of school.

What Happens to Your 529 Plan if You Child Gets a Scholarship?

So the question you may have is, okay, my child got a full ride to X, Y, Z college. Now what am I going to do with the funds in the 529 account? You can actually withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings.

So remember you’re contributing your money into the 529 plan, and that’s going to the investments that you’re choosing. Hopefully good growth mutual funds in those 529 plans. Then whatever your money earned, you would have to pay the taxes on that earning. Got it? You’ll have to pay taxes on the earnings.

What Happens if You Don’t Use 529 Plan Funds for Education?

Now, if you were to draw any funds for non-qualified expenses you’ll pay a 10% penalty on your gains on top of the taxes owed. And so if your child gets a scholarship, which would be great opportunity where you can basically get your money back, whatever you contributed. Remember you already pay taxes on it a long time ago before your child went to college.

So that’s really great. That’s a really great benefit and just a little bit of peace knowing if your contributing this money into a 529 for your child, then if your child gets a scholarship, you can get that money back. You would just have to pay taxes on the earnings. And that’s similar to how your retirement accounts work such as your 401k, Traditional IRA, 403b.

If your child gets a scholarship and you want to refund the amounts of that scholarship, that’s fine. But before you do that, see if there’s anything that you can buy for your student. Maybe a laptop or something that’s for educational purposes that funds in a 529 plan will cover. That’s something to consider fellow parents.

What Options Do You Have if Your Child Doesn’t Go to College?

Now, the last question, what happens if your child doesn’t go to college?

I know this is something that my wife and I have discussed. What if our children, all three children don’t go to college and we’re saving 529 plans for all of them? Well, we’re hopeful at least one will go to college and get an education to become some kind of professional, but in the event, all three of them do not go to college.

Well, you can transfer your 529 plan to an another eligible member of the family. So this can be a cousin, a nephew, or even yourself. So, if I wanted to go back to school to learn something with my wife, we can use it for culinary school, maybe to learn how to cook. That’d be something pretty cool to do later in life.

Basically, you have many options of what you can do with your 529 plan in case your child doesn’t go to college. Listen up young people: Make sure that if mom and dad, or mom or dad are putting money into a 529 plan, that you start to be open and honest with them about your plans after high school. They’re saving all this money and they need to know, are you going to go to school after high school? Are you going to wait? Parents with 529 plans need to know what the plan is. There’s no reason why your parents should be saving money in a 529 plan for you if you don’t take advantage of it. You’re basically wasting money.

So have these conversations, have these kind of discussions where you’re really talking with each other about college and post high school plans.

Do you have any more comments or questions about the five 29 plans? Please ask below or email me at matt@habeshafinance.com or you can reach me on Instagram, Twitter, @habeshafinance and you can ask questions there. And I’ll do my best to answer.