Saving for your Kid's College with a 529 plan
If you are looking for the best way to save for your kids’ future college expenses there isn’t necessarily a “one size fits all” solution. In fact there are a number of choices available, each with their own list of benefits and features. The 529 plan is probably the most common and well known option. Similar to a Roth IRA, a 529 plan offers tax-free growth as well as tax free withdrawals as long as the money is used for higher education expenses. This isn’t limited to major 4-year universities either. Most 2-year schools, community colleges, and trade schools qualify under the program.
In addition to tax free growth and tax free withdrawals, if you use your home-state sponsored plan (such as the Oregon College Savings Plan), your contributions may be deductible against your state income tax. These features make the 529 plan very attractive for those who want to maximize their savings for college.
More flexibility than before
One of the traditional drawbacks of a 529 plan was the limited flexibility in how the funds could be used. Previously, if a child did not attend college or received a scholarship, parents might have faced a 10% penalty and income tax on earnings when withdrawing the money for non-qualified expenses. However, recent changes have made 529 plans more flexible. For example, up to $10,000 per year can now be used for K–12 tuition, and up to $10,000 (lifetime) can be used to repay student loans. Most notably, starting in 2024, unused 529 funds—up to $35,000—can be rolled over into a Roth IRA for the beneficiary, provided certain conditions are met. These changes make 529 plans a more versatile option, though parents who want maximum flexibility for non-education-related expenses may still consider alternative methods.
For ultimate flexibility a parent can use a traditional brokerage account and invest the money for growth just like a 529 plan. With this option, you give up the tax benefits of the 529, but there are no restrictions on how the money is used and for whom. If the money is managed in a tax efficient manner, this can be a great alternative for many families.
Alternate saving options
One more option is a UTMA or UGMA account. These stand for Uniform Transfer to Minors Act and Uniform Gift to Minors Act. These accounts offer a middle ground between the two prior choices. On one hand, the money doesn’t have to be used for college expenses, but the account does have to be used for the benefit of the child only. There are also some tax benefits to these accounts as some of the growth may be taxed at the child’s tax rate, which is typically lower than the parent’s rate.
In summary, if you want the best plan to purely maximize college savings, a 529 is the best option. If you still want to provide savings for your kids, but aren’t 100% certain if you’ll need access to those funds down the road, then the other choices can be managed in a way to provide a very similar benefit, while providing additional flexibility.
