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529 Plans: A Primer

January 18, 2019 | Posted in: Wealth Strategies

Come home from the hospital, rock baby to sleep, open a 529 plan.

With school tuition continuing to escalate each year, many families are taking advantage of the benefits of 529 plans.  Not only do the plans allow contributions to grow tax-free, they also have very small contribution requirements.  Below are a few of the many benefits of opening a 529 plan:

  1. Ease: “My wife and I were able to open a 529 plan for our son and daughter in under 15 minutes. We manage it online and have set up automatic contributions from our bank which we view as a ‘forced saving’ technique. four years later, it is already growing without us really having to pay much attention to it.”
  2. Tax-Exempt Growth: The growth of a 529 plan is free from federal income tax which is a huge advantage considering it has the potential to compound over 18 years!
  3. It’s For More Than Just Tuition: A 529 can be used for many aspects of a child’s education – certain room and board costs, technology expenses, books (if those exist by then), as well as supplies and equipment.
  4. Proceeds Do Not Need To Go To Your Child: Unused funds can go to a different beneficiary, penalty free. So when your child gets that full athletic scholarship or is on track to becoming the next Mozart, you can easily pass along funds to another child for their use.
  5. Estate Planning Benefits: For other family members who wish to assist with school tuition, a 529 plan is the only investment vehicle that allows a grantor to give up to five years’ worth of gifts at one time. This is an efficient way to transfer money out of an estate with the additional benefit of tax-free appreciation.

The list of benefits goes on and on, but perhaps the biggest benefit to opening a 529 while you child is still young is that time is on your side.  With an 18-year horizon, the portfolio can be invested for growth.  Combined with disciplined and systematic contributions, the plan should support a number of educational options for the emerging scholar.

The SEC website is a useful resource when considering a 529:

There are a number of self-service ways to implement a plan.  Here is one of many to explore: