What is a 529 College Savings Plan?

College is expensive, and if you’re trying to save money for your kids to go to college then it can be tough to figure out how to do it.

There are so many companies out there offering college plans that it’s difficult to pick one which is going to give them enough, especially with the cost of rising tuition. The 529 plan is one you really should take advantage of yet many people haven’t even heard of it.

These plans are designed for individual children so you can keep siblings separate, an ideal thing if you have kids with different future plans. This is also good because it means you can have a separate maximum for each child and won’t have to worry about maxing out a single plan, leaving them without enough.

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Tax Free

The biggest ouch of savings is definitely the taxes. Most savings are taxed when you make the income and then taxed on the interest they accrue over time. This is where a 529 plan is superior – it’s tax free. By being tax exempt. You’re able to save your federal taxes by only paying them on the money when you earn it rather than having to pay it on the interest the money accrues as well. While the interest might not be as high as some other types of accounts this will save money in the long term because you’re not paying it all out again in taxes.

Prepay Tuition

Tuition rates keep going up but if your child has a specific college plan such as in state you can lock in a current tuition rate with a prepay plan rather than using it as a savings account. This means that you won’t need to worry about the rising cost of tuition and can have their college paid off before they even attend if you’re smart. There are some downsides though. Doing this limits what the funding can be spent on so you’ll still have out of pocket costs for room, book, board, and college fees.

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Employer Matched

Just like many employers will match your 401k contributions some will also match 529 contributions so you could potentially be able to double what you can invest in your child’s future without having to put extra money in yourself. This is doubly advantageous and, if you start early, will allow you to save more than enough to cover costs since the maximum allowed is well over $300,000.

Growth Options

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A 529 plan isn’t just a savings account, it’s actually set up like an investment so the money will grow based on how it is invested. A safer choice if you’re getting a later start will make sure that the money doesn’t depreciate before they have to access it while an investment based one will potentially make you more money in the long term because it’s based on the markets and how the money is invested.

How To Find One

Plans are state specific so you’ll want to look at your local state specifically because options differ between them. You can look up plans by state here.

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