Families dream of providing the best education possible for their children. But with college costs rising year over year, the dream of higher education requires financial strategy. That’s where 529 plans can help.
A 529 plan is a tax-advantaged investment account used for educational expenses. It can pay for college expenses like tuition, housing, and other costs. It’s also used for K-12 tuition, apprenticeship programs, vocational programs, student loan repayments, or funding a Roth IRA.
“The reason 529 plans are beneficial is that they’re typically invested in the stock market,” Adrienne Davis, Certified Public Accountant (CPA) and Certified Financial Planner (CFP) at Zenith Wealth Partners, says. “Savings accounts are typically subject to inflation. They may not have high-interest rates. The hope is, with a 529 plan, investing it in the stock market and allowing it to grow over time, you’ll be able to grow that nest egg.”
The tax benefits are another bonus for this investment vehicle. For 2023, contributions of up to $17,000 per contributor, per beneficiary or recipient, may qualify for the annual gift tax exclusion.
Davis says some states allow for tax deductions each year the plan is invested. In addition, states like Maryland and West Virginia contribute money to the account.
529 Plans in Action
Onika McLean was introduced to 529 plans by a friend in the finance industry.
“She said they have this financial thing where your kids can have like a 401(k) plan for college,” McLean says. “Instead of getting them the latest Jordan sneakers, you can give these coupons out, and people can pay into their college savings account so they can go to school.”
McLean is a managing clerk at a legal firm, a comedian, and a single mother of two daughters who are 29 and 24 years old.
She knew she wanted her children to attend college. Finding out there was a way to send them and cover some of the expenses sounded great.
“They’re six years apart, so for my oldest daughter, I put more money in it than for my younger daughter,” McLean says. “With my younger daughter, I was more aggressive with the investment portion because, in my mind, she had more time.”
Davis told Word In Black this is a common method for 529 plans.
“We encourage our clients to put money into a 529 plan and we start them when their kids are younger,” Davis says. “When they’re closer to the age where they want to start pulling from the funds, we do have to make sure we’re conscious of what the allocations are so the account doesn’t experience a lot of volatility.”
These accounts are often a mix of stocks and bonds, similar to other types of investment accounts.
For years, McLean put $50 to $200 in the account with every paycheck. When it was time for her children to attend college, she was able to help them pay for tuition, housing, books, and laptops.
Although her eldest didn’t graduate from college, she didn’t have significant financial obligations like student loans. McLean used the 529 accounts to pay for anything financial aid couldn’t.
With the remaining money, she changed the beneficiary from her eldest daughter to her youngest and continued contributing. Investing in the account doesn’t stop once college begins — contributions can continue while in school.
Her youngest daughter graduated with a biochemistry degree and no debt from attending college.
“If the state doesn’t have it, they’re not going to market it,” McLean says. “As a Black community, oftentimes, we don’t know about finance and it’s intimidating. This was something that wasn’t intimidating for me.”
Finding the Right 529 Plan
Davis doesn’t recommend this plan to everyone. Speaking with a financial professional who can look closely at each person’s finances is always advised.
“You have to choose which underlying investment you want to have, and then you have to look at what the fees are,” she says. “The fees can really eat into the principal balance over time.”
Davis recommends parents take stock of how they’re caring for themselves financially before opening one of these investment accounts. Putting on their oxygen masks first, Davis says.
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