College can be expensive. And as anyone who has contemplated funding a child’s college education likely is well aware, it’s not getting any cheaper. Which is why it’s critical to consider taking advantage of any and all programs that make paying for a child’s education less burdensome financially, including, in particular, what’s known as the Section 529 college savings plan.
Much of the appeal of 529 plans lies in the tax breaks they provide. Not only may contributions to a 529 earn the contributor a state income tax break (many states offer income tax deductions for 529 contributions; deduction amounts vary by state), any withdrawals from the account, including earnings as well as principal, come out federal-income-tax-free, provided they are used for qualified education expenses: tuition, books, room and board, school supplies, etc. Withdrawals can be used for qualified expenses at any eligible college or university in any state, and at some schools abroad.
As compelling as these tax advantages can be, and as daunting as the college price tag may seem, the 529 remains largely overlooked. A 2018 study by financial services firm Edward Jones found that 71 percent of Americans do not know what a 529 plan is.
Even those in the know may not be familiar with certain nuances that could help them get the most out of a 529 plan. Here are some suggestions to help you maximize the program’s benefits: