More reasons to like 529 accounts
I'm on the record saying 529 education saving plans are among the most effective ways to save and invest for future college costs. These plans are popular and widely used. Every state offers at least one 529 savings plan, and Americans have more than $224 billion invested in over 12 million accounts.
A 529 savings plan offers many benefits, including:
- Money invested grows tax-deferred, like an IRA.
- Withdrawals are tax-free when used for qualifying education expenses.
- Parents own the account, so the child never has control of it or access to it.
- There are no income limits, so anyone can own one and contribute.
- Most states have no age limit for when the money must be used.
But before you save a nickel in a 529 plan, you should know about all the ways you can use the money accumulated in these accounts.
For example, what happens to a 529 plan account if your child doesn't go to college? After all, this is a possibility: Last year about 34 percent of high school graduates didn't enroll in college.
For starters, keep in mind that even if your beneficiary doesn't go to college immediately after high school, she may decide to enroll at a later date. Because there's no time limit on using 529 account assets, you can just let the account grow until whenever your beneficiary decides to pursue higher education.
Also, remember that your beneficiary doesn't have to enroll in a college or university. Tax-free 529 account withdrawals are allowed to pay tuition at a trade or vocational school, or for other qualifying career training programs.
What if your beneficiary receives financial aid, a scholarship or a grant that pays for most of her tuition? Other costs may not be covered, and a 529 account can be used to pay for books, supplies, and room and board.
Know that if the child you've named as beneficiary doesn't need this money or doesn't go to college, you can change the beneficiary to someone else in your immediate family who might benefit. Eligible beneficiaries include siblings, a spouse or children of the beneficiary; cousins; nieces; nephews; aunts; uncles; grandparents or a parent.
As the account owner, you can also use the money for your own education costs. If you're thinking about getting a graduate degree or getting additional training to boost your career, as long as you incur qualifying higher education expenses, the withdrawals used for those will be tax-free.
Finally, you're always free to use the money for any reason. If you take withdrawals that aren't used for qualifying education expenses, you'll have to pay federal and state income taxes, and a 10 percent federal penalty tax on the earnings.
Of course, this is the last resort after you consider the other options.
