Should you fund a 529 Plan or a Savings Account for college?
College is one of the more expensive costs that a parent can bear for their child. If you can save additionally towards college, after funding your retirement and regular expenses, then saving for your child’s future education could be a great opportunity. There are different approaches to saving for college between a 529 Plan and a savings account.
529 Plan
A 529 Plan is a tax-advantaged account that can be used to save for educational expenses. The money in your 529 plan can be used to pay for qualified education expenses. You can open a 529 savings account for yourself, your spouse, or a designated beneficiary such as your child.
Tax Benefit
There is not a tax deduction for 529 plan contributions, however, the contributions grow on a tax-deferred basis. Meaning distributions are tax-free when they’re used for qualified education expenses which include, tuition and fees, books/supplies, room and board, computers and internet access, expenses for students with special needs, and expenses related to a certified apprenticeship program.
Other Options with a 529 Plan
A 529 is not limited to post-secondary education. You can withdraw up to $10,000 per year to pay tuition at an eligible private, religious, or public primary or secondary school. Recently the IRS now allows you to use up to $10,000 to pay qualified education loans taken out by the designated beneficiary.
Potential Downside to a 529 Plan
One of the disadvantages of a 529 Plan is its stipulation to be used on educational expenses only. If the designated beneficiary decides to no longer go to college, you can transfer the money to another beneficiary. It’s important to note there is no deadline to use the money and it can keep rolling over to new beneficiaries without a tax penalty. However, it still must be used for educational expenses. If not, the funds will be subject to federal income tax and a 10% penalty.
Savings Account
A savings account is a demand deposit account that can be used to set aside money for any of your future goal. You can get a savings account at any local bank, online bank, or credit union. When opening a savings account you have the option of determining your interest rate on deposits, fees you pay, and your options to access the funds.
Protected Funds
Savings accounts at traditional and online banks are FDIC insured up to $250,000 per depositor, per account type and financial institution. That way, even if the bank fails your money is protected. Credit unions are insured by the National Credit Union Administration.
Withdraw Anytime for Any Expense
Oftentimes, your bank will need you to make a minimum opening deposit to start your savings account. After your account is open, you can continue to save the account and deposit your money as needed for any expense.
529 Plan v. Savings Account
A 529 plan’s main benefits are tax-deferred growth, more growth potential, and tax-free withdrawal for qualified education expenses. A 529 Plan can be invested into ETFs or target date funds which can offer more growth opportunities compared to a lower interest-earning savings account. Unlike a savings account that is not exposed to risk, a 529 plan can lose money since it is tied to investment vehicles.
Every state offers its own 529 Savings Plan account. No matter where you live you can contribute to any of them. There are different stipulations within each plan regarding contribution limits. You may need to be mindful of the gift tax as well. 529 Plan contributions can qualify as a financial gift to someone. A gift tax can apply if the amount exceeds the annual limit. For 2022, a person filing independently had a limit of $16,000 as a married couple filing jointly could contribute $32,000. Regular savings accounts are not subject to the above tax concerns and contribution limits unless you gift above $16,000 or $32,000 to someone.
Which Should You Choose?
Both are great options to consider for college savings. The right choice depends on your financial position and goals. You could contribute to both options as it doesn’t have to be an either-or mindset and approach. Consider talking to your financial advisor about whether to use a 529 Plan or savings account for college planning. If you don’t have one yet, Wiser Wealth Management is happy to help.
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Michaela Dowdy
Financial Planning Associate
