If you have a family and are trying to save money for both retirement and college simultaneously, knowing where and how to set aside funds for both can be a juggling act. Thankfully, there is a savings option, referred to as a 529 Plan, which is designed to help save money for college. Here is some basic info about them.

A 529 plan is a savings plan with built-in tax advantages, to clearly help save money for future college tuition and associated costs. They are also known as “qualified tuition plans” and authorized by Section 529 of the Internal Revenue Code, hence their name. In general, there are two categories of 529 plan to consider: 1) Prepaid Tuition Plans and 2) College Savings Plans.

Your Two Main Options

Pre-paid tuition plans are fairly self-explanatory; they allow participants to set aside money specifically for purchasing credits for future tuition at participating universities or colleges, which can also be used to pay for room and board, food, etc. These plans are usually sponsored individually by state governments and have specific residency requirements to abide by; however, in exchange, they also guarantee investments in plans that they sponsor.

College savings plans, on the other hand, are a bit more general and flexible than the pre-paid option. They typically allow a saver (also referred to as “account holder,” most likely a parent) to establish an account for a beneficiary (the presumed student), which is designated to pay for the beneficiary’s eligible college-related expenses.

However, these plans allow for a variety of investment options for the saver’s contributions, such as bond mutual funds, stock mutual funds, age-based portfolios, etc. which the plan then invests the depositor’s money into accordingly. Withdrawals from these plans can usually be used at any university or college when the time comes.

Tax Benefits

When it comes to tax benefits, 529 plans certainly have them for the interested investor. 529 plan earnings are not subjected to federal tax and, quite often, state tax if they are used correctly to cover college-related expenses such as tuition, room, and board, etc. Other potential benefits often offered by state-sponsored plans include matching grants from state government, only if your 529 plan is sponsored by your state of residence, though.

However, if you do withdraw funds from said plan and do not use them for eligible expenses, then they will automatically be subjected to both income tax and an additional 10 percent federal penalty on the earnings themselves. A word to the wise – use the money for what it is being saved for and avoid any and all hassle.

If you have a young child and are not sure how much or when to begin saving for a 529 plan, here’s a tip – if your child is currently in daycare or similar program that requires tuition, then merely budget that money aside when said program is no longer necessary. You are already in the habit of helping pay for the future; the trick now is to put that money into a different account early on and build up those savings for when your little one needs that cash for college.

Don’t Forget About Retirement

529 plans are a reliable option for educational saving because they are relatively clear-cut, often have government assistance, and have significant tax benefits. They also allow you to continue saving for your retirement more quickly. Are you currently doing that right now, though? If not, then a qualified retirement plan (QRP) is another savings vehicle you should consider looking into right now.

Thankfully, Anderson has a team specialized in this area alone that can help answer all retirement saving-related questions and figure out the best plan for you moving forward. If this sounds like a conversation you wish to have, then contact us today for a free 30-minute strategy session. We’re ready to help.