Five hundred twenty nine dollars might not sound like enough to pay for college, and that’s because it’s not! College is hella expensive and it’s easy to get overwhelmed when figuring out how to pay for everything. A 529 College Savings Plan can help! Whether you are a parent or a student, it’s important to know how a 529 Plan could benefit you.
What is a 529 College Savings Plan?
A 529 College Savings Plan is a tax advantage account that can be used for education expenses. Typically parents open these accounts for their children as a way to save for their future education expenses like college tuition, textbooks, and school supplies. Funds saved in a 529 can also be used for apprentice programs and other post-secondary education programs, paying off student loans (up to $10,000), and room/board for full-time college students.
So…. how does it work?
You must be 18 years or older to open a 529, and there can only be one beneficiary per 529 plan. If you are 18 years old and want to start saving for your own college expenses, a 529 plan may be worth investing in (pun intended).
Once an account is opened and money is added, the money will be invested into the stock market as a way to help your money grow faster than a traditional or high yield savings account. By just sitting in the stock market, your money will make more money! And the money you GAIN from the account? You don’t have to pay taxes on!
When it comes time to pay for education using your 529 account, the money withdrawn does not count as “income” and therefore won’t be taxed.
FTS: For the Students
This is one of the things I wish I could have taught my students about, but it was not in the Iowa Common Core curriculum for math, so here I am attempting to teach you about it now! If you are anything like me, paying for college was not something I talked about with my parents and I wish I had. Especially since I knew I was going to go to college from an early age. Learn from my mistakes, please! Find the tea here.
I encourage everyone to talk with their parents about paying for college, even if the only thing you learn is your parents have no idea how to pay for college and they don’t know what a 529 Plan is. That’s ok! You are not doomed.
First, find out if your parents have college savings for you to use. You can impress them (maybe) and ask if you have a 529 Plan and approximately how much will be available when you plan to start college. Be prepared for a variety of answers.
Next, do some research about how much your career path with cost and what options are available to pay for it. There are tons of factors that go into it, so here is a good place to play around with different options you are thinking about. If you have an idea of what your major will be and where you’d like to go to school, you can use this to estimate how much you will need in order to pay for school. This calculator allows you to input any contributions from your parents or you, any scholarships you may receive, and will go as far as estimating your monthly payments post graduation AND if you’ll be able to afford them with your estimated monthly income. I went through all of this with my own numbers and it was pretty accurate!
Then, create a plan. The link to the calculator above also gives you options if your original idea ends up being unfeasible. For more information about what you can do to prepare for college, check this out.
Everyone’s situations are different. A good rule of thumb is not to borrow more than your expected annual salary post-graduation. So, if you want to be a teacher, the starting salary for teachers in Iowa is $50,000, so do not borrow more than $50,000 for your degree. If the calculator told you that you’d need more than that, consider starting at a community college or paying for room and board out of pocket each year.
That $50k includes Federal Student Loans too! If you are about to start college, you’ll need to fill out the FAFSA here. When I went to college, I filled out my own FAFSA, therefore I knew exactly how much I borrowed each year. There is a short course you must take when borrowing from the government, but if your parents do your FAFSA for you, you may miss out on important information. Be proactive and make sure you know if your parents are taking out student loans for you and that they pass that information along to you since those loans are in your name and you will be responsible for them.
FTP: For the Parents
Maybe you went to college, maybe you didn’t. No judgement here! There are tons of paths people can take after finishing high school and a 529 Plan can be beneficial no matter the path your children choose. Whether your child is a newborn or a teen, opening a 529 can give them some peace of mind that their path is partially funded.
If you’re not sure how to get started, check out this college savings calculator to get a better idea of what college will cost, how much will be available when they graduate high school, and how much they may need to fund. Can you only afford to contribute $25 a month? If you start when they are born, that could be $10,831 by the time they graduate, or 28% of their college expenses covered, even though you only contributed $5,400 over the course of their lifetime. That is $5,431 of free money!
The power of the 529 comes from the interest compounding over time, so the sooner you start saving for your child, the more time that money has to grow.
What state do you live in and why does this matter? Depending on where you live, each state is a little different, you might be able to write off contributions to a 529 Plan from your state income taxes.
FOR EXAMPLE:
If you live in Iowa (shoutout to my home state), you can open an ISave529 and deduct up to $5,800 per year in contributions per beneficiary.
Let’s say you have 2 children. Each has their own 529 that you put $100 into each month. At the end of the year you will have put in $1,200 per child, so $2,400 total. When tax time comes around, you can subtract that amount from your total income to reduce the amount of taxes you’ll have to pay to the state.
What if my child gets a full ride scholarship that pays for their college?
Usually a full ride refers to tuition being paid for, but means that other expenses like room, board, books, and supplies still need to be paid for. All of these expenses can be paid for using 529 funds.
If your child manages to get these other expenses paid for through scholarships, then the 529 plan could also be used for grad school!
What if my child wants to go straight to the workforce?
A 529 can still be beneficial! Up to $35,000 can be rolled over into a Roth IRA for the beneficiary when they turn 18, or later, if they won’t use the funds for education. If you have more than one child, you can change the beneficiary on the account too.
Another option is to withdraw the funds entirely and use them for something else entirely! In this case, you will pay a 10% penalty since the funds won’t be used for education (the whole point of the savings account) AND you will pay taxes on that money since it will be considered income.
Other Tidbits about 529’s:
I don’t personally have children (yet) but some of my friends do and I remember being invited to their birthday parties and being told “do not bring a gift! they already have so many toys I have no more room!” The invites would say something like “your presence is our present <3” which is so cute. When I would attend these parties, I remember feeling strange for following directions because there was inevitably a pile of presents anyway.
529 Plans have the option to accept contributions from anyone. If you have people in your life who you know will get your kid a present, ask them to contribute to their 529 and help them save for future education expenses instead! It’s a win-win. The people who care about your child still get to give them something, and you as the parent don’t have to clean up all the wrapping paper or find a place to store that new [insert popular kids toy here] that they will play with once and forget about.
Bonus: This could help avoid meltdowns from siblings who aren’t quite old enough to understand the concept of birthday gifts and why they aren’t included. (maybe, idk, again I do not have children)
