The higher education investment accounts known as 529 plans can be a great deal for many people. The tax-advantaged investment accounts offer families saving for college a federal tax break on earnings, along with state income tax deductions in many states. College savings plans also typically offer prepackaged investments based on the particular needs of families, which can make them an attractive option.
But the following four groups of people can particularly benefit from one of these college savings plans.
[Know what steps to take before opening a 529 plan.]
1. Casual investors: In general, 529 plans offer packages of investments based on the age of the child, the beneficiary of the account. Parents who don't have much experience with investing can do so without having to study individual investments.
"For an individual that does not have the interest, expertise or time to manage the plan's assets, this may be a good solution," says Chadderdon W. O'Brien, a New Jersey-based financial planner and financial risk manager. "Over time, the investments will shift to a more conservative mix as the beneficiary approaches college age."
The investments get progressively more conservative regardless of whether a family chooses an overall conservative or more aggressive age-based plan, experts say. The difference is the starting point - whether the account is initially invested with an eye to less or more risk.
2. Parents in states with high taxes: While parents in high-tax states benefit the most from having an income tax deduction, it's very common for other states with state income tax to offer deductions for 529 plans. States differ in their limits for deductions on annual contributions. The good news for some parents is that certain states don't limit the deduction based on a parent's income, while other states offer really high contribution limits for deductions.
For instance, in financial planner Pam Dumonceau's home state of Colorado, parents are only limited by lifetime 529 plan contributions. So a parent who brings home $500,000 could contribute $300,000 in one year and have the whole contribution amount reduce their income on their state income tax return. Families contributing to 529 plans should check with their state's treasury office for tax laws.
[Explore if you should consider another state's 529 plan.]
3. Grandparents who want control of money they give: Grandparents who want to give money to their grandchildren but don't want to give up control of the funds should open a 529 plan in their own names with the grandchild listed as the beneficiary, says Dumonceau.
Parents shouldn't worry about this money being separate from an account they opened. Students can use withdrawals from multiple accounts to pay for their education. Aunts and uncles may also open an account for their nieces and nephews.
The one catch is that if family members are planning on opening a 529 plan for estate planning purposes - that is, if someone wants to use a 529 plan account as a way to transfer wealth to a family member without having it be counted as a part of their estate - they should be healthy. Jimmy Williams, a certified public accountant and personal financial specialist in Oklahoma, says that in this case, an account owner should expect to live for at least three years.
[See more tips for grandparents helping save for college.]
4. Families with time on their side: Families with young children may have over a decade to let money grow. "Starting a 529 for the benefit of the child at an early age can be an effective way to save for college while taking advantage of the growth that markets provide over time," O'Brien says. "Even small monthly contributions to the plan can go a long way."
If a couple deposits $50 per month into a 529 Plan for 18 years, they'd accumulate $10,800 in contributions, O'Brien says. If families are able to add to that amount with 5 percent annual earnings, the plan balance would be about $17,500.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
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