Saving For College With 529 Plans

First, an unpopular opinion: your children can borrow money for college, but you can't borrow money for retirement. Don't sacrifice your ability to retire to save for your kids' college.

That said, if your retirement is on track, it's a great thing to be able to contribute toward your kids' college education expenses. My own parents did, and, man, what a huge help!

There are a few ways to save for college—a dedicated brokerage account is the simplest. As the child approaches college age, just move toward less volatile investments.

A better approach, though, is to use a 529 plan. A 529 (referring to §529 of IRS code 26) is a tax-advantaged account, a bit like an IRA, where money can be saved for the purposes of education. Money in a 529 can be spent on tuition, books, fees, and room and board.

Note, though, that 529s are governed by individual states. This is unfortunate:

  • plans vary dramatically between states: some offer terrific benefits, while others are fairly mediocre,
  • contributions are only deductible from state income taxes, not from federal taxes,
  • some states (like California) don't even offer state income tax deductions, and
  • plans offer only certain investment options, some of which may have high fees.

529 plans are still valuable, though, especially in states with higher income taxes. Check to see what kinds of plans your state offers.

529 Hacking: Save For Yourself!

This is a pretty rare situation, but if you anticipate needing money for your own education in the future (a graduate degree, for example), you can open a 529 account in your own name, too!

If you don't end up going back to school, 529s are transferable within families. The balance of your own account can be transferred tax-free to your spouse, siblings, nieces or nephews, or future child.

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