When it comes to saving for your child’s future, you have several options. You could set aside money in an investment account to purchase blue-chip companies, open a whole life policy for your child, or create a 529 plan for education expenses. These are not all the ways to save for your child’s future, but they tend to be the most common. Since our last article on this topic covered the concept of Child Life Insurance, let us dive into 529 plans and how they might play a role in setting your child up for success.

At its core, a 529 plan is a savings and investment vehicle designed specifically for educational expenses. There are two types of 529 plans: savings plans and pre-paid plans. With 529 college savings plan, you deposit post-tax dollars that are invested for you. When it is time for your child to enter college, they can make tax-free withdrawals from the account for education expenses. The second type of plan is a 529 prepaid plan, which allows you to pay in-state tuition at a public college or university. These plans allow you to lock the tuition payment to that point in time, potentially helping you or your child save money on the cost of higher education.

One thing to note with 529 plans is that they are run by individual states. Some states have minimum contributions, while other states offer tax incentives to in-state contributors. A common question I hear regarding 529 plans is whether the plan you choose needs to be in your home state or the state where your child might go to college. The answer to both of those questions is “No.” You can create a plan in any state. These plans can be purchased directly from the state instead of through an adviser, which should mean lower fees for you.

Between the two plans, the 529 college savings plan is far more popular. It is much more flexible and if you are starting this account for your children early in their lives, you want as much flexibility as possible.

Speaking of versatility, what happens to the money in a 529 plan if a child doesn’t go to college?

Many parents hope their children will enroll in college and be successful students, but that does not always happen. Funds within a 529 plan do not need to go toward the costs of a four-year university. They can be used for virtually all education expenses. If your child enrolls in an associate’s program or at a trade school, these funds can be used to further learning and provide a head start on a career.

Of course, some students complete high school and are done with their education. If this happens, you can change the beneficiary of the 529 plan to a family member or friend who is going to college, or even use it for your own education. You can change the beneficiary of the funds on an annual basis. The last option would be taking the money out of the account. If you select this option, you will need to pay taxes on all earnings in the account plus a 10-percent fee for not using the money for education.

529 plans are a fantastic way to help children get a head start in life by either eliminating or shrinking student loan burdens. The average student loan debt is hovering around $30,000 for a bachelor’s degree. Reducing this stress from a child’s life could allow them to focus more on their studies and less on how they are going to pay for those studies. This can be more of a gift than providing access to money after graduation.

At Wealthy Habits, we teach teens about planning for the future by making smart financial management decisions.  Another session of Wealthy Habits online courses are starting in October.

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