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Today, the total amount of student loan debt in America is estimated at $1.73 trillion, with over 44.7 million individuals who have outstanding loans. So – for those who can save for their children’s future, what’s the best way to help prepare for their college tuition and expenses? We love sharing information about 529 plans. If you’re not familiar with a 529 plan, it’s simply an investment account specifically designed for educational savings for a beneficiary, or the individual for whom the account is set up. It offers tax benefits, the potential for growth, and a good deal of flexibility. In this Money Hacks episode, Alex focuses on ways you can help prepare your kids, nieces, nephews, and grandchildren for student expenses in the future. Let us know if you have any questions or if you’d like to discuss student-saving strategies.
- Three Reasons a 529 Plan is the Ultimate Gift to Give
- Ways to Make a 529 Plan Work for You
- College Planning Basics: Saving for Higher Education with 529 Plans
Any money questions you’d like answered? Our Money Hacks series is created from conversations we have with employees, investors, savers, and all people planning for their financial futures. What topics are on your mind for our next episode?
Hey, it's Alex again with episode number 88 of Money Hacks, a number of investors have been asking us as their children are getting into the spring semester, in grade school, junior high, high school. How should I be saving for college for my child or my nieces and nephews or my grandkids? Should I be putting money in some type of college savings vehicle? Like a 529, or should I put it into a Roth IRA? What are there? Can take some of the money out for things like college savings or just some type of savings account or investment account? What's the best way to save for college for somebody?
The short answer is it depends and more importantly, I'd say that putting money aside on a systematic continuous basis, whether it's monthly, quarterly, or biweekly, is important. Like saving more to your 401k contributions, it is the first big step, the most important step to helping to build and accumulate college savings for somebody important to you like your children, grandchildren, nieces, nephews, or anyone else.
I think that's certainly more important than ensuring you optimize the vehicle that you're using. Now, with that in mind, we tend to be a big proponent of 529 college savings plans. Some really good tax benefits allow the money to grow on a tax-deferred basis that you put into a 529. Then when it's taken out for higher education, either secondary education, or post-secondary education, community college, university, or technical school, all of those earnings that you've accumulated over the years are tax-free. The distributions are tax-free. You don't pay tax on those earnings.
As long as the 529 proceeds are used for tuition, room, and board, or reasonable expenses associated with higher education. So, for that reason, we like 529 accounts. There are also depending upon the state in which you live some state tax deductions that you get on your contributions going in. They're great vehicles to encourage your family members to also contribute and save towards one of your, your children or loved one's future education. But that's not the only way you can certainly use other vehicles that might provide more flexibility, like just a taxable investment earmarked for somebody's college savings. It doesn't have the same tax-deferred benefits. It doesn't have the state tax benefits that some states offer in 529s, but it gives you a greater degree of flexibility to use that bucket of money for some other need or to use it early if there's some reason to do so for the person who is putting the money into that account for the same thing with the Roth IRA.
So, a lot of different ways that you might be able to save for somebody's college education. But that's not the only way to do it and just getting it started and putting that money aside, building it into your budget is the number one priority to help somebody accumulate money for a major expense and to build their education and propel them into a career.
Disclosure: The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a non-qualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.