Will Your Finances Be Ready for College When Your Child Is?
Higher education is one of the most important investments you can make for a child or grandchild’s future. In fact, studies suggest that a college degree may translate into significantly higher earning power over time. It’s no secret, though, that college is also expensive. How do you balance the high cost of college with other competing demands, such as saving for retirement or paying down debt?
A popular and cost-effective potential solution is a state-sponsored college savings plan. Commonly known as a 529 plan, it’s named after the section of the Internal Revenue Code that made this type of plan possible.
What’s so great about 529 plans?
In two words: tax benefits. The money you contribute to a 529 plan can grow free from federal income taxes. That means your investment earnings may compound faster than in a taxable account.
What’s more, as long as you use your 529 savings to pay for qualified education expenses, such as tuition, room and board, books, and other necessary equipment and supplies, those withdrawals are also free from federal income tax. Some states even offer residents state income tax benefits on contributions and withdrawals. If you use 529 savings for non-qualified expenses, however, the earnings portion of your withdrawal may be subject to taxes and penalties.
Giving You Flexibility
With a 529 plan, you can save for higher education costs for just about anyone in your life – your children, grandchildren, other relatives, or even yourself if you decide to go back to school. There are generally no age limits for the account beneficiary and, unlike other tax-deferred investment programs, your ability to contribute is not phased out at higher income levels. Most important, the money you save in a 529 plan can be used at any eligible college, university or vocational school.
What if your child decides to skip college? The money you save in a 529 plan can be transferred to another family member, or even yourself, for higher-education costs although taxes and penalties may apply. Please consult the specific state’s plan document for specifics on transferring a 529 plan.
A Winning Combination of Benefits
Affording college for a child or grandchild requires careful planning. A 529 plan offers attractive benefits that can make it easier to save. Contact your financial professional to see if a 529 plan is right for your college savings needs.
Article prepared by Northwestern Mutual with the cooperation of Ben Beshear. Ben Beshear is a Wealth Management Advisor with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Ben Beshear is based in Cincinnati, OH. To contact Ben Beshear, please call 513.366.3664, e-mail at email@example.com or visit beshearfinancial.com