You probably have a lot on your plate right now, and it can be hard to figure out how to prioritize each of your financial goals.
But one thing is clear: The more money you save, the more options your children will have when it comes to higher education. Could a 529 plan be the tool you need to make it happen?
Prepaid plans allow you to pre-purchase "units" of tuition at rates similar to today’s. They are cashed in when the student attends school.
529 college savings plans are built so you can invest in portfolios that make gains (or losses) based on the performance of the underlying assets in the plans.
Most states offer 529 college savings plans, only a small handful offer the prepaid option. Both can also be sold by independent brokers and both come with operating fees and operating costs ranging from 0% - 2% depending on a number of factors.
529 college savings plans earnings are tax-deferred. If the money in the account is used to pay for higher education expenses, as it’s intended, it can be entirely tax-free. Before locking yourself into one plan or another, check to see if your state-sponsored plan offers additional benefits; many come with tax credits or grants that can help further offset costs.
According to the IRS, “Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution.” These can include activity fees to fund all on-campus student organizations and activities. Expenses for books, supplies, and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. See the IRS Education Credits: Questions and Answers for more specifics.
Note that room and board, insurance, medical expenses (including student health fees), transportation and similar personal, living or family expenses do not qualify. That said, as long as you plan for the largest expenses, there are other ways for your student to cut costs once she's in school.
529 assets can be used at any eligible institution of higher education, not just four-year colleges. Whether your child wants to be a computer programmer or cosmetologist, an artist or an EMT—just about any post-secondary training can be paid for with a 529 plan without penalty. Check with the school before confirming.
Thanks to compound interest, even small contributions can add up over time. For example, a $500 starting contribution + $200 added monthly, at 6% interest over 18 years = $77,000 for college. Much like retirement accounts, the sooner you can get the plan set-up and start building, the better.
Many plans make it easy to continue adding funds with automated contributions that can be drawn from other accounts at the intervals of your choosing.
It's true that 529 plans will have an impact on how much much financial aid a student may qualify for, but not as much as funds stored in some other types of accounts. According to the Department of Education, every dollar stored in a 529 account in a parent's name will subtract up to 5.6 cents from your family's federal need-based financial aid package. By contrast, funds stored in checking and savings accounts in a child's name will subtract up to 20 cents per dollar from federal financial aid.
When setting up the account, you’ll select a beneficiary, the person you’re saving for. You’ll want to have their social security number handy to make the process easy.
But what if that person decides against higher education? You still have a number of options:
Change the beneficiary to a sibling or other qualifying family member who will attend college.
Use the money to pay for your own continuing education.
Save the funds for a future grandchild.
Take a non-qualified withdrawal and pay income tax and a 10% penalty on the earnings portion of the withdrawal.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards.
Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.
Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.
Fabric by Gerber Life offers a mobile experience for people on-the-go who want an easy and fast way to purchase life insurance.
When you have a baby, there’s a lot to consider. Now's the time to focus on your financial priorities. Here's where to get started.
Top signs of “adulting” include saving money, doing taxes, and signing up for life insurance, according to Fabric’s new research. Read on for more surprising insights.
The pandemic and economic challenges mean some families have exhausted their emergency cash. Here’s how to prepare for (and deal with) the worst.
Here’s how a recession impacts the economy and how you can keep your family’s finances as steady as possible in tough economic times.
Term Life Insurance Policy Series ICC22 2205-4004 WSA and Accelerated Death Benefit Rider policy series ICC22 2205-2623 WSA (and state variations where applicable) issued by Western-Southern Life Assurance Company, Cincinnati, OH which operates in DC and all states except NY, and distributed by Gerber Life Agency, LLC using Fabric Technologies. Gerber Life Agency, LLC is an affiliate of Gerber Life Insurance Company (est. 1967). All are members of Western & Southern Financial Group (Western & Southern). Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Product provisions, availability, definitions and benefits may vary by state. Payment of benefits under the life insurance policy is the obligation of, and is guaranteed by, the issuing company. Guarantees are based on the claims-paying ability of the issuer. Products are backed by the full financial strength of the issuing company.
All sample pricing is based on a 30-year old F in Excellent health for the coverage amount shown and a 10-year term policy, unless otherwise stated. Gerber Life Agency, LLC (GLA) is an insurance agency licensed to sell life insurance products. GLA will receive compensation from Western-Southern Life Assurance Company for such sales. The NAIC Company Code for Western-Southern Life Assurance Company is 92622.
Western-Southern Life Assurance Company's A+ Superior A.M. Best Rating: Superior ability to meet ongoing insurance obligations (second highest of 13 ratings; rating held since June 2009). Ratings are subject to change from time to time. The ratings shown here are correct as of 09/03/2022. For more information about a particular rating or rating agency, please visit the website of the relevant agency.
Plan like a parent. is a trademark of Fabric Technologies, Inc.
Gerber Life is a registered trademark. Used under license from Société des Produits Nestlé S.A. and Gerber Products Company.
In the State of California, Gerber Life Agency, LLC is known as and does business as Gerber Life Insurance Agency, LLC.