For some of you, children might be the furthest thing from your mind right now (says the girl who’s drinking a Bloody Mary as she’s writing this), but if you’re entering your late-20s/early 30s, they seem to be everywhere. One minute you’re pounding tacos at 2am after a night at the bars and the next you’re going to bed at 10pm to be prepared for a farm-themed 1st birthday party the next morning. It’s inevitable, and even if you don’t want children, odds are some of your friends will. Get ready.
May 29th is 529 day, and because so many in my inner circle have children, I thought it would be a great opportunity to write about one of the costs so many parents either forget, choose to ignore, or put off because it seems so ridiculously far away: college.
Yes, your child may only be 10 months old and eating fistfuls of dirt, but one day he’s going to want to pursue something a little larger than your backyard garden bed. And that pursuit costs money.
My parents invested in a 529 plan for both my brother and me, and it was one factor that allowed both of us to graduate college debt free. I can’t tell you what a blessing that forethought has been for both of us, how that propelled us so much farther ahead of our peers financially, and it’s something I plan on doing for my children as well.
I’m such a believer in these plans that I’ve also become notorious for contributing to the 529 plans of my friend’s children. I’ll be honest, I’m completely out of touch when it comes to kids, and I have no idea what type of toy is appropriate for a toddler; thus, anytime I get invited to a 1st birthday party, I skip Toys ‘R Us and instead contribute straight to their 529. Who needs another Paw Patrol truck? (That’s a thing, right?)
Even if you currently don’t have kids, learning about 529 plans now is important for when you do. I mean, let’s be real: this won’t be on the forefront of your mind when you’re constantly battling morning sickness and trying to plan out a nursery. And even if you don’t plan on having children, it may be something you want to open for a niece or nephew to officially become the coolest aunt ever.
Sold on the idea? Then let’s dive in.
WHAT IS A 529 PLAN?
A 529 plan is essentially another “folder” just like your IRA or 401(k) that acts as a holding place for your investments. You open a 529 plan, contribute money, and then pick the investments (i.e. mutual funds, stocks, bonds) you want to put that money towards. These are normally state-run plans, but don’t worry, you’re not limited to your home state’s plan: if you live in Tennessee but want to invest in the plan that Massachusetts offers, you can. Also note that your child does not have to attend a school in the state of the plan either – they can be used for any institution in any state.
There is no set contribution limit to a 529 plan, but you want to restrict it to the amount you believe you will need for qualified postsecondary education expenses; otherwise, any money not used for that purpose will be taxed at your normal federal rate and receive a 10% penalty to boot. Not great. In addition, if you contribute over the gift tax limit of $14,000 annually, you may be subject to gift tax on that amount, even if it’s your own child.
So why invest in a 529 rather than a normal savings account or mutual fund? Let me list the reasons:
1) EARNINGS ARE NON-TAXABLE: Similar to a Roth IRA, the federal government does not tax any earnings within the account as long as those earnings are used for qualified education expenses (think tuition, room & board, books, computers, etc.). In some cases, states do not tax them either. This could mean you’d automatically be getting a 20+% return on your investment earnings. Um, yes please.
However, note that if you do not use them for those qualified expenses, you will not only be taxed your normal federal income tax rate but also issued a 10% penalty. Not so “yes, please,” so make sure to estimate how much you would need to fund future education costs.
2) CONTRIBUTION TAX CREDITS/DEDUCTIONS: Not all states offer these, but in my home state of Indiana, you receive a 20% tax credit on all contributions up to $5,000. This means that if you contribute up to that maximum, you get $1,000 back on your tax return. Check out to see if you’re state offers a similar benefit – who doesn’t want 20% off their college education?
3) TRANSFERABLE: You can change the beneficiary of the account to another member of the same family of the account without penalty. Thus, if your first-born doesn’t use the entire amount saved, you can transfer it to your second child to use.
HOW TO SET ONE UP FOR YOUR CHILD
I know you’re probably excited about all of the benefits and ready to throw some money down for this. But where do you start? How do you choose a plan? How much do you need to save?
Slow your roll, lady. I’ll walk you through the steps.
1) Research available 529 plans and if your home state has any tax credits or deductions related to them (just Google your state’s name + “529 tax benefits”). More times than not, if your state offers some time of tax advantage, you’ll want to go with that one. Essentially, it’s a discount on your savings, and you know we women love getting deals. If not, find one that has investment opportunities (i.e. low fee funds) or plan features that fit your goals.
2) Set up an account through the plan you choose. This essentially is just like setting up any other investment account, so have your information ready and it should be fairly painless.
3) Pick where you want to invest your savings. Just like a company 401(k), your investment choices are somewhat limited in these plans. I suggest looking for low-fee index funds, which historically have provided decent returns.
4) Determine your end savings goal and calculate how much to save each month to get there. A great way to calculate this is to use this Annuity Calculator. You can plug in different variables and see how they affect the total future value of your account. I’ve provided an example below, where the end value is ~$194,000 based on $500 monthly payments for 18 years at a 6% return.
5) Sign up for automatic savings if your plan offers it. Just like your normal savings account, automatic transfers not only make it easier to save but also ensure that you’re doing it in the first place. If your plan offers the ability to do this, jump at the chance. Your child’s education is more important than a new swimsuit you believe you have to have for your next lake weekend.
6) Spread the word. You can let your friends and family know in a tactful way that you opened a 529 plan for your children. When birthdays or holidays come around, simply state that contributions to the plan are welcome gifts in lieu of toys or clothes. Plus, it can potentially be a tax write-off for them as well, so kind of a win-win scenario.
That’s it! 529 plans offer some great benefits, and I hope you consider helping your child get a head start on life by opening one. It’s one of those gifts they will truly be grateful for (and one you can hold over their head forever).
Would love to hear from you: Did you benefit from a 529 plan? Why have or haven’t you opened one for your child?
 A 529 plan can only be used for an eligible postsecondary education institution, so funds cannot be used for private elementary or high school tuition.