Going to college is a dream for many kids (and parents), and along with that will come a large tuition bill. In-state college tuition can range $25K+ all in each year, so that could be $100K for 4 years. Out of state of private school can be much pricier than that. Of course going to college isn’t right for everyone and not all parents can pay for it, but in the face of graduating with all that student debt, it’s not uncommon for young professionals turning into parents wanting to help out if they can! 

If you are looking to put aside money for your kid’s college, it would be advantageous to do it in a way that could save you on taxes. Governments often use tax breaks as incentives for individuals and families to save and invest money in particular areas, most notably healthcare and retirement but also with education! If you’re looking to save for your kids college and get a break on your taxes, then a 529 plan may be right for you! 

How it works

A 529 plan is a special investment account in which you deposit money for a beneficiary (often your child, but grandparents can open one too for a grandchild) that will one day be used for higher education. You can typically open a 529 plan through your regular brokerage firm, or you can open one with your state’s designated 529 broker. We’ll get into it more, but I recommend going through your state’s plan for a few reasons. 

You or others can deposit money into this account at any time, and you can choose the investments offered to you. As with other investments, you’ll want to pick growth funds with low expenses (the lower the better!). I’m invested for BabyMoneyFinance in a target date plan. This fund is more aggressive now and will get into less risky investments as BMF gets closer to 18. There’s also no maximum amount that you can contribute each year. 

The goal is for this money to grow over time, along with more money that I’ll be putting in on a periodic basis. I hope this to be a huge blessing for any child, and regardless of how much you’re actually able to provide, I feel like anything will help!

What the tax breaks are

In addition to helping paying for your kids college, you’ll also get some tax benefits. You don’t get any federal tax breaks on money out into the plan, but you may get some state ones. For example in Georgia, where I live, the Path2College529 plan, the state sponsored plan, I can get a tax deduction up to $4,000 annually. With the goal of having your money in investments that are growing, and will grow for the next 18 years, gains are not taxed. So hopefully with your money growing 5-10% per year, and compounding (keeping it invested which means your overall balance increases then that increased balance grows again at 5-10%). 

So, potentially getting breaks when your put money into it (depends on your state) and having that money grow tax free for 18 years is a pretty good deal overall! 

How it can be used 

Within a 529 plan, there are a few ways this can be used. The intended usage of the money is for college expenses, basically anything you’re paying for college whether room, board, tuition, books etc. Although it may vary, the plan that I’m in allows me to use the money also for private K-12 school, up to $10k per year. 

If your child decides not to go to college, you can pass it along to a close relative and let them use it (ie sibling or cousin). If your child gets a scholarship (woohoo), you can withdrawal that money and use it for other things but have to pay tax on the gains. If you use the money for something other than education and your child didn’t get a scholarship, then you pay tax on the gains and a 10% penalty. Not ideal but not the end of the world if you did need to withdrawal some money. 

Different plans and states may have different rules, but the plan I’m invested in doesn’t have restrictions on where the college is located, meaning if BabyMoneyFinance wants to go outside of Georgia, we can still pay for it using that money. 

If you’ve got a kid and are looking to save for their college, doing so through a 529 plan is a smart move!