Short Answer: What is a 529? It can help you cover a variety of secondary education expenses.
When exploring paying for education post-high school graduation, you’re bound to hear the term “529” thrown around.
But, what is a 529? If you’re confused by the term, you’re not alone. According to a survey by investment firm Edward Jones, only about 29% of Americans know about 529s as an education savings tool.
Below, we’ll explore 529 education savings plans in-depth, with the help of expert insight from Mary Morris, the Chief Executive Officer of Virginia529, the largest 529 plan in the U.S.
Roth 401(K) is to Retirement as 529 is to Post-Secondary Education
What is a 529? It’s like a Roth 401(k) plan, but for education.
Think about it, Roth 401(k) plans are offered by employers and provide tax-advantaged accounts to help save for retirement. Contributions grow over time, and when it comes time to retire, you can draw down from a Roth 401(k) tax-free.
529 education plans are provided by the state and offer tax-advantaged accounts to help save for education expenses.
529 tax benefits come from both the federal and state level, and contributions aren’t taxed. Withdrawals (for qualifying expenses) from a 529 aren’t taxed, either. That means you don’t have to pay taxes on any earnings or growth on the account, as long as it’s used for qualifying expenses.
529 tax benefits also include specific state tax benefits. As you explore your state’s plan, look into what advantages your state may offer, such as tax-deductible contributions.
“The more you save in advance, the less debt you have to take out in loans”
A 529 plan can help ease the burden of post-high school educational expenses, explains Morris, “the more you save in advance, the less debt you have to take out in loans.”
If you can cover some of the cost of education with a 529 plan, you may not have to take on as many loans. That means lower monthly student loan payments and a chance to build up savings and wealth as you start a career.
The earlier contributions start in a 529 plan, the more time they have to grow. However, it’s never too late to open a 529 plan, and any contribution can be a helpful way to pay for educational expenses.
Even if you’re uncertain about what the future may bring in terms of education, a 529 is a way to keep your options open. It only makes it easier to cover expenses.
A 529 isn’t Just for College Tuition
There’s a misconception that 529 plans can only pay for college tuition. However, you can use money from a 529 to cover lots of secondary education programs and expenses, explains Morris, including:
- Community college
- Online courses
- Graduate programs
- Vocational school
- Associate degrees
- Private elementary and secondary education
Not sure if your course of study is covered? You can consult the U.S. Department of Education’s database to see if the institution is accredited.
What’s more, 529 plans can also cover expenses around qualified education, including:
- Room and board
- Internet access
- Living expenses
529s aren’t limited to use on a traditional 4-year college campus. They could help someone pay for certifications later in life, or they could help cover the cost of trade school for a recent high school grad. Considering the 529 tax benefits could translate to big savings on everything from textbooks to tuition.
A 529 Can be a Family Savings Tool
Not exactly sure what the future holds in terms of your education plans? It doesn’t mean a 529 account goes to disappears, says Morris. While 529 accounts have designated beneficiaries, it’s simple to transfer the balance of an account to another family.
For example, if a high school student has a 529 account but gets a full scholarship to college, they can transfer the account to a parent, sibling, or other family members. That means anyone seeking education can take advantage of the account, ensuring the money doesn’t go to waste.
Once you can answer, “What is a 529?” it becomes clear it can be used for so much more than just college tuition. A 529 can help establish a young person’s career, whether entering the trades or an associate’s degree. A 529 can be used as a tool to save for mid-life career changes or additional certifications.
No matter what you want to use it for, it can be valuable to start building a 529 account today to save for future education.
How do I get started?
If a 529 plan sounds like the right fit for you, consider the following steps to get started:
- Look up state plans. Most states have their own 529 contribution plan. Find your state’s offering for more details on local 529 tax benefits.
- Open an account. In some states, you can open an account for as little as $10 to start, Morris says.
- Set a recurring contribution. If you only have $10 or $20 to spare each month, set up a recurring contribution to a 529 plan. Chances are, you won’t even notice the $20 leaving your account each month. From there, it’ll have a chance to grow.
If you’re a high school student (or younger), consider talking with your parents about setting up a 529 account in your name. You can deposit gift money or paychecks from a part-time job to save for school.