With a new school year being kicked off, it’s an optimal time to think about saving and paying for your children’s college. The cost of higher education can exceed $100,000 per child in some cases. If your kids are debt-free when they graduate, they may end up starting their working lives in a better financial position than many of their peers. It might sound daunting and unattainable with the growing cost of higher education expenses in today’s world, but our team is equipped to advise you on several education saving accounts that can be tax advantageous.
At MRK Financial Solutions, we believe your financial plan should be all-encompassing and incorporate saving for education. There are several ways to save, and it’s important to consider the tax consequences (or benefits) of each option.
Here’s an overview of what and why a 529 Plan might be the right fit for you.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan.
529 Plan Tax Benefits
A 529 savings plan works similar to a retirement account like your 401(k) or Roth IRA by investing your after-tax contributions in mutual funds, ETFs and other investments. Withdrawals for non-qualified educational expenses are subject to a 10% IRS tax penalty and are taxed as ordinary income. They can offer federal tax breaks and can be used from Pre-K all the way to college or other professional schools. Your investment grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified higher education expenses.
You may also qualify for a state tax benefit, depending on where you live. More than 30 states offer state income tax deductions and state tax credits for 529 plan contributions.
If you’ve thought about opening an education savings account, we encourage you to reach out to a member of our team. Starting early on your education plan is a textbook way to ensure success. Our financial advisors will choose investment vehicles and tax-saving options that best fit your long-term goals.