Financial planning is often associated specifically with retirement planning and while retirement may represent a huge consideration, there are many other aspects of wealth management that require careful decision making. For many people, college can be among the largest expenses they’ll face, right behind their mortgage. Regardless of the specific circumstance, a 529 plan can make a lot of sense when trying to accumulate money to pay college tuition and maximize tax advantages.
A 529 plan is an investment account you can set up specifically to save for your child’s college expenses.
Since there are so many differences in each personal situation, and because 529’s have differences depending on your state, there are many questions you’ll need answered.
The biggest benefit is in tax-free growth. Once you open a 529 plan, and choose the investments therein, there will be no federal taxes levied on the growth, nor will withdrawals be taxed as long as the withdrawal is for a qualified expense. This is different from other investment accounts that may incur taxes on withdrawal, like from some types of retirement accounts.
In Colorado, a 529 plan can help save on taxes, since your contributions to a 529 are deductible for state taxes. That means you can reduce your state tax liability and also grow your investments tax free.
Your tax deduction for 529 plans varies by state. It will be important for you to discuss the issue with your financial planner and get current and accurate information for your particular state. Not all states allow for a tax deduction, and there is no deduction for your federal tax bill.
The tax-free growth and potential tax deduction can only be realized if the money from a 529 plan is used for a qualified expense, which includes tuition, room and board, fees, books, and computer equipment and supplies. If you don’t use all of the money in the 529 account on one child, you’re able to transfer the money to their sibling.
If you take a withdrawal from a 529 account and do not use all of the proceeds for qualified expenses, you may be in for a tax bill. Because of this, the need for proper care and planning cannot be overstated, and you should involve a Certified Financial PlannerTM to help you set up your contributions and plan your withdrawals.
While often referred to as a “college saving plan,” a 529 is really an investment account. Once deposited, you can choose from a variety of investment vehicles, with different choices available in each state.
Each state has different 529 plans available and each plan may have different investment options. For example, in some Colorado 529 plans, you may have access to the Vanguard Group fund family, or to MetLife funds. Regardless, your money can be invested for better growth opportunities, rather than sitting in a savings account earning small amounts of interest.
There are three areas where you may encounter fees while setting up your 529 plan. First, there may be minimum contributions required to open the investment account. You may encounter account minimums from zero dollars all the way up to several hundred dollars. Second, there can be fees associated with the investments in your 529 plan. Your investment choices should be made carefully with this in mind. Just like any investment account, expenses can eat into gains, so you should consider this before making your allocation choices. Lastly, you should always get the help of a qualified financial planner before you set up a 529 plan. Getting expert help is always recommended, especially when there are so many complexities involved.
The maximum contributions to a Colorado 529 is $400,000 for each beneficiary. This number has gone up over time and will likely increase.
If you have children and want to help them pay for their college education, a 529 plan is an excellent way to do it, but it’s not for everyone. As you’ll note from the information here, there are many variables that need to be evaluated before making a decision. The best way to start is to call Dechtman Wealth Management. Make an appointment to meet with a Certified Financial PlannerTM professional to discuss your personal situation and your goals. With the right planning and the right expert help, you’ll make the best decisions for your financial future.