By Paula Smith, Senior Vice President, Product Strategy and Development – Retirement and College Savings, Voya Investment Management
February 14, 2023
I’ve been in love with 529 plans since I first started working with them 20 years ago. At the time, they offered an elegant solution to the key problem of how to save enough for college. However, over time, these plans have come to provide a lovable array of other benefits.
So, this Valentine’s Day, I’m providing three reasons to love 529 plans, too:
- Flexibility
Many people assume that 529 plans are designed only to cover college costs. That’s just one possibility.
The beneficiary of a 529 savings account may use the money to pay for education expenses at all levels — from kindergarten through college, law or medical school, or technical school.
Students who want to learn a skilled trade through an apprenticeship program may also use 529 savings to cover qualified costs (such as textbooks, tools, and other supplies). A 529 account can even be applied to student loan repayments of up to $10,000 for the account beneficiary or their sibling.
Even better, the recently passed SECURE Act 2.0 will permit rollovers of unused 529 savings into a Roth IRA starting in 2024, giving the beneficiary a significant head start on retirement savings. What can be better than that?
2. Tax benefits
529s benefit from tax-free investment earnings, which help the account grow faster due to reinvestment and compounding (unlike other savings vehicles whose earnings are subject to income taxes each year). Distributions are also tax-free — provided they are used to pay for qualified educational expenses as described above.
Those who contribute to a 529 account may get a break on their state income taxes. Some states offer a deduction on contributions to an in-state 529 savings plan; others give a tax break for contributions to any state’s plan.
In the unlikely event that money is left over after college, the rolling over 529 funds to a Roth IRA can translate to tax benefits essentially through retirement and beyond.
3. Time (and friends and relatives) are on your side
Ask any parent of adult children — the childhood years pass quickly! So, the earlier saving for education begins, the better prepared the special kid in your life should be for their future.
Even modest, consistent contributions each year with tax-free growth can translate to significant savings over time.
Increasingly, 529 programs offer gifting portals that allow friends and family to join in, contributing, as well.
There’s so much to love about 529 plans. And helping a child defray or avoid future borrowing for an education is one of the best ways to show them you love them.
About the author:
Paula Smith is Senior Vice President, Product Strategy and Development – Retirement and College Savings, for Voya Investment Management, a wholly owned subsidiary of Voya Financial. Voya Investment Management serves as 529 Program Manager for the Wisconsin Tomorrow’s Scholar® program and the Iowa IAdvisor® program. She has over 20 years of experience working with retirement plans and 529 programs.
Important information (disclosure)
An investor’s or a designated beneficiary’s home state may offer state tax or other benefits that are only available for investments in that state’s qualified tuition program. Please consider this before investing.
Earnings component of non-qualified withdrawals may be subject to federal and state taxes and the additional federal 10% tax. The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Investments in 529 Plans are subject to certain charges, which will reduce the value of your Account as they are incurred. Please see the Program Description for details of charges or fees that apply to the plan. Investments 529 Plans are subject to investment risks, including the loss of the principal amount invested, and may not be appropriate for all investors.
An investor should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s Program Description. The Program Description should be read carefully before investing.
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