Any parent that has considered how they are to pay for their children’s college education has likely heard of a 529 college savings plan. While the 529 plan is unquestionably the most effective way to save for your children’s college expenses, there are some things you need to know before setting one up for your child.
Let’s start with the number one question my clients have when it comes to 529 plans; “What if my child doesn’t go to college or need the money for college?”. This is a great question to ask and certainly can be a drawback to 529 plans.
Simply put, if you withdraw the funds for anything except educational expenses, the funds will be subject to taxes and a 10% penalty. You do have the option of changing the beneficiary on the 529 plan anytime and as many times as you wish.
For example, if your oldest child does not need the funds in the 529 plan, you can change the beneficiary to a younger sibling and he or she can utilize the funds. If none of your children use the funds, you can change the beneficiary to a niece, nephew, grandchild, or even yourself.
Now, on to what makes the 529 such a great savings vehicle for education expenses.
Earnings in a 529 plan grow tax-free and will not be taxed when the money is withdrawn for a qualified education expense.
Non-Qualified Expenses include:
Brad Lupkes, CFP®