A few of my friends who just had or are about to have babies are asking me about 529 plans and whether it is worth opening one. Like everything else in financial planning, it depends, but this would be a great time to discuss what 529 plans are and when it makes sense to open them.
What is this thing?
A 529 account is a savings account designed for higher education. That’s it. It’s that simple. You put some money in, the money grows, and your child uses it years down the road to go to college. You often hear the words “tax exempt” or “tax advantage” but make sure you are clear exactly what that really means. A 529 does not work like a 401(k). Your current taxes will NOT go down if you contribute to it. However, as long as you take the money for what the IRS defines as qualified education expenses, all the interest that has been accumulated will be tax free. This is a great advantage.
A 529 is a general blanket term that may refer to a savings plan or a prepaid tuition plan. Above, I am referring to the “savings” plan. Some states have a program where you prepay the tuition and your child can go to any in-state school for free. That is NOT what I am referring to in this post. Here is a good guide the state of FL put for us about the differences. If your state offers both, think about your baby and where he or she will be years down the road before making this choice: http://www.myfloridaprepaid.com/learning-center/savings-vs-prepaid-plans/
Is a 529 plan worth it?
So let’s get back to the 529 savings plan that lets you use the money anywhere you want. When young parents ask me what’s better, a 529 plan or a savings account, the answer will always depend on “what exactly do you need this money for?” Obviously no one knows; your baby was born 5 days ago but if you are the type of family where going to college is not a choice and the money will indeed be used for college, a 529 opened at birth wins. Why is that? Read More