May 29 is National College Savings Plan Day. 529 plans are tax advantaged savings plans that are designed to encourage saving for future costs of high education. 529 plans are legally known as “qualified tuition plans.” They are sponsored by states, state agencies, or educational institutions. The name comes from the fact that the savings plans are authorized by Section 529 of the Internal Revenue Code.
While 529 plans can be a great way to save for college, only 29 percent of Americans know about them, according to a recent poll by Edward Jones. This was down from last year, when a similar poll showed that 32 percent of those polled understood the purpose of a 529 plan.
Benefits of a 529 Plan
A 529 plan offers many benefits that make it a better idea that using a bank account to save for college. For example, you can get a tax deduction or credit for contributions to the account; more than 30 states and the District of Columbia offer a direct state tax deduction. Additionally, earnings grow on a tax-advantaged basis and as long as the funds are used for qualified educational expenses (like tuition, fees, books, and room and board), it is withdrawn tax-free.
According to College Savings Plans Network, last year the average size of a 529 account was a record high of $24,057, which was up 13 percent from the previous year. In addition, total investments in 529 accounts reached a record $319 billion last year, which was up 16 percent from 2016.
The new tax law continued to provide benefits to having a 529 plan. Private school tuition from high school down to elementary school can now be paid for through plan withdrawals as well. Families can withdraw up to $10,000 a year for these expenses.
While it can seem impossible to save for the high costs of college, a 529 plan is a way to help families do just that and receive tax advantages at the same time. If saving for college seems impossible due to your financial situation, please contact one of our Bond & Botes offices for a free consultation.