529 savings plans have long been regarded as one of the greatest ways to save for college.
The tax benefits of 529 savings plans are a key factor in their popularity. As a result, withdrawals are tax-free as long as they are spent for qualified educational costs, and contributions to your account grow tax-deferred.
That covers fees, lodging & board, and tuition. Additionally, many states offer a tax credit or deduction for your contributions. This is particularly if you reside in that state and make investments in one of its 529 plans. Federal contributions are not eligible for tax deductions or credits.
Their comparatively large contribution limits are another appealing aspect of 529 savings accounts. There is no annual cap on the amount you can donate, but if you give more than $15,000, federal gift taxes may apply.
529 savings plans aren't your only choice for setting up a fund for your child's education, even though they can be quite helpful. This article examines various alternatives to a 529 plan you can consider when saving for college.
Technically speaking, a prepaid tuition plan is a different kind of 529 plan.
However, it functions differently from the more well-known and widespread 529 savings plan. With the prepaid plan, you can pay for future tuition at the going rate. This could result in significant savings in the long run.
Despite the fact that certain states have a ceiling on the maximum balance that can be in your account, these limits are generally liberal and range from $235,000 to more than $500,000.
Prepaid tuition plans' main flaw is that they often only apply to specific community institutions, colleges, and universities within a given state. These savings programs typically solely cover tuition. This is opposed to 529 savings plans, which can pay for a variety of costs, including room and board.
In addition, just a few states now provide prepaid tuition plans. All 50 states and the District of Columbia have at least one, and frequently multiple, 529 savings plans.
However, if your state has a prepaid tuition program and you have a good chance that your child will attend college there, you should give it some thought.
One of the most obvious is to start early and with a taxed account.
You can keep any capital gains tax-free in an account for a long time. If you let them grow, capital gains on stocks, bonds, and funds won't be taxed until they are sold. Additionally, if the 529's limitations concern you, you wouldn't have to worry about them. You'd have more freedom over how and when you spend the money.
However, take care to verify the account's owner. Assets held in a child's name have a greater negative impact on financial aid than those held in a parent's name by more than three times.
Some families with lesser incomes would be better off saving in a regular taxable account than in a 529 plan without the limitations.
This is because if a married couple filing jointly had a modified adjusted gross income of less than $83,350, they would not be subject to long-term capital gains taxes on their investments (in 2022).
Because a Roth IRA allows for tax-free growth of the funds, several families utilize them to save for college.
Contributions may be withdrawn tax-free if you are under the age of 59½, but not if you are over that age. Many people value this freedom. But, using a Roth IRA for this reason has a number of drawbacks, not the least of which is diminishing your retirement savings.
A Uniform Gift to Minors Account (UGMA), a custody account that permits adults to transfer assets to minor children, is a third flexible option.
The way these accounts are treated is a fundamental benefit of the plan. In these accounts, a piece of the gain is tax-free, a portion is subject to child taxation, and the remaining share is subject to parent taxation.
The amount of freedom in how the money are invested and spent is significant with a UGMA. No specific academic program or educational path is required of the participant.
Coverdell Education Savings Accounts (ESA) had a significant advantage over 529 savings programs until they underwent changes in 2017: they could be used to pay for both college and pre-college expenses.
The potential benefit of a Coverdell ESA for college savers is that it can offer a greater selection of investment options, such individual stocks, than the majority of 529 savings plans, which are often restricted to a menu of mutual funds.
Comparing Coverdell plans to 529 plans, there are a few big disadvantages as well. You won't be eligible for a tax credit or deduction for the money you donate. Your annual contributions are capped at $2,000 per person.
Your modified adjusted gross income (MAGI), as of the 2021 tax year, cannot be more than $110,000 for single filers and $220,000 for married couples filing jointly.
While many families use 529 plans to save money and pay for their children's college, not everyone should use them.
Families may be forced to search elsewhere due to restrictions, costs, and a few other limitations.
These other methods of saving include:
There are possibilities for paying for tuition in advance, but that is a type of 529. Do your homework on these alternatives to a 529 plan and begin saving.