The college savings plan known as a “529” is often touted as a smart way to save for a child’s college education. But these plans involve more than just putting away money for college. Here, Robert H. Scott III, an expert on 529s, shines light on how the plans work.
What are 529 plans?
A 529 college savings plan is an investment account that families can open to save for college by investing money that grows tax-free. The name of the account comes from Section 529 of the U.S. tax code.
The money can be used for qualifying education expenses, such as tuition, room and board, textbooks, computers and travel.
People can add money to a 529 account whenever they like, or set up automatic withdrawals from their checking account.
When money is placed into a 529, it’s not as if the money is just sitting there. You will have several possible investment options to choose from that comprise stocks, bonds or a combination of the two. There are usually preset investment portfolios based on a child’s age. When a child is young, these portfolios are mostly stocks and are invested more aggressively. But as the child ages, the portfolio automatically transfers more money to bonds, which are usually less volatile. So the effectiveness of a 529 plan depends on how well the stock market performs.
Is the money only for the first four years of college?
It is also possible to use 529 plans for graduate school. So if a child earns a full scholarship as an undergraduate, then the money from the child’s 529 plan can be saved for graduate school.
A recent change in 529 plans allows them to be used for education before college. More specifically, they can be used to pay up to $10,000 per year for tuition at K-12 schools.
For college, however, there are no limits on how much can be withdrawn to cover education expenses.
Do 529 plans vary by state?
Every state in the United States, plus Washington, D.C., has its own 529 plan. However, not all plans are the same. For that reason, it is important to research which plans have the lowest fees, the best investment options and the best overall returns.
There are no residency requirements. In other words, you don’t have to live in a particular state to invest in the state’s 529 plan. However, if a state offers a tax deduction for investing in its 529 plan, then you have to live in that state to get the deduction.
What if the beneficiary of the 529 doesn’t go to college?
It is possible to move funds in 529 plan accounts from one beneficiary to another. Beneficiaries who do not use their 529 plan funds can even transfer the account to their own children or another family member without penalty.
The biggest problem with 529 plans is that money not used for qualified education expenses incurs a 10% penalty on investment earnings. Those earnings are also subject to federal and sometimes state income taxes if they are not used for education expenses that qualify under a 529 plan.
Who should invest in 529 plans?
Families unable to qualify for financial aid are the target investors for 529 plans.
A 529 plan account with a large balance could keep a student from being eligible for financial aid, even if the balance is much less than the overall cost of the degree. So, in cases like this, a 529 plan could cost families money rather than help.
Grandparents whose grandchildren are unlikely to qualify for financial aid are also common investors in 529 plans.
Parents, grandparents or anyone with the ability and desire can contribute up to $16,000 each year if a child’s parents are not married – or $32,000 if they are married – and not pay gift taxes. People can contribute up to this maximum amount each year for each beneficiary. So, if a grandparent has two grandchildren whose parents are married, they can contribute $32,000 in one year to each child’s 529 plan.
Each state has different rules on how much someone can contribute over a lifetime to any one 529 plan, but it ranges from $235,000 in states such as Georgia and Mississippi to $550,000 in Missouri.
Do 529 plans work?
Yes. They are a way for families to invest money in the stock market and, if all goes well, enjoy financial gains that they can withdraw for their children’s education without paying taxes. They work best under several conditions.
First, if a family is unable to qualify for financial aid, 529 plans offer an effective way to save for college because the money is invested in the stock market and can grow faster than other options, such as savings accounts. Plus, the gains are not taxed as they would be if invested in a non-529 plan investment account.
Second, because the investment time horizon is short – possibly less than 18 years – your money does not have much time to grow, so you have to invest early. There is no age limit for beneficiaries of 529s. You can start one for yourself or someone else at any age.
Third, if you live in one of the states that offer a tax deduction for investing in a 529 plan, that is a factor to consider. Specifically, a 529 holder should look at whether the value of the tax deduction is large enough to outweigh the fact that there are fewer or worse investment options.
Fourth, anyone can contribute to a person’s 529 plan, so it makes a great gift that will not end up being broken or thrown away.
Fifth, grandparents or other relatives, and even family friends, can set up 529 plans for grandchildren, stepchildren, nieces and nephews. In general, it’s probably more efficient to have one 529 plan, but some people like to retain some control over the plan they invest in, so some kids may have several. For instance, I have 529 plans for both of my kids, but their grandparents have 529 plan accounts for them, too.
There are other situations that allow you to withdraw 529 plan funds and not be subjected to the 10% penalty, such as when a beneficiary dies, becomes disabled or earns a full scholarship. Relatives might find this type of saving more emotionally rewarding than gifting money now or giving a larger inheritance at death.
Are there any drawbacks?
There are two primary problems with 529 plans, even for families that might benefit from them the most.
First, timing when to withdraw money is more challenging than, say, for retirement. For example, if the market is having a down year, but a beneficiary is in college and you need to pay tuition, then the benefits can be smaller overall. Say you have $50,000 invested in a 529 plan, and the market falls 10% right before you withdraw the money. If that happens, then you would only have $45,000 to withdraw. On the other hand, if the market increased 10% right before you needed the money, then you would have $55,000 to withdraw.
Second, your investment options are limited. If your state offers a tax deduction for investing in a 529 plan you might choose to invest in your state’s plan even if that plan might not be very good, such as if it has expensive fees. Alternatively, you might choose to invest in another state’s 529 plan and lose the state tax deduction, but have more investment options and fewer fees. This could save you more money in the long run.
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Robert H. Scott III does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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10 essential money-management skills for children
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Parents who help their children understand and use money wisely can also set them on the road to being financially secure adults. As children grow into adults, having base savings to tackle expenses like a first apartment or higher education will make the unpredictability—and the expenses that come with that unpredictability—of life a bit easier to manage.
But a 2016 study from T. Rowe Price finds many parents miss chances in everyday interactions to help their children learn money skills. Making a few small changes to parenting habits may help more than you think. GoHenry compiled a list of 10 financial skills for children to learn how to earn, save, and spend money.
Often, money lessons can be incorporated into everyday activities. For instance, talking about which item on the shelf is the best value turns grocery shopping into a lesson on price comparisons. Or, showing children how they can divide allowance money between savings and spending illustrates basic budgeting. Such early discussions mold their money mindset as they grow. As young adults, from early experiences of earmarking funds between savings and spending, they understand the benefits of having part of their paycheck automatically deposited in savings.
Read on to learn tips and examples to help your child develop skills for better money management later in life.
People Image Studio // Shutterstock
Parents who help their children understand and use money wisely can also set them on the road to being financially secure adults. As children grow into adults, having base savings to tackle expenses like a first apartment or higher education will make the unpredictability—and the expenses that come with that unpredictability—of life a bit easier to manage.
But a 2016 study from T. Rowe Price finds many parents miss chances in everyday interactions to help their children learn money skills. Making a few small changes to parenting habits may help more than you think. GoHenry compiled a list of 10 financial skills for children to learn how to earn, save, and spend money.
Often, money lessons can be incorporated into everyday activities. For instance, talking about which item on the shelf is the best value turns grocery shopping into a lesson on price comparisons. Or, showing children how they can divide allowance money between savings and spending illustrates basic budgeting. Such early discussions mold their money mindset as they grow. As young adults, from early experiences of earmarking funds between savings and spending, they understand the benefits of having part of their paycheck automatically deposited in savings.
Read on to learn tips and examples to help your child develop skills for better money management later in life.
Since children are not responsible for household budgeting and large financial decisions the way adults are, it can be difficult for them to grasp the concept of money. While planning for the future is typically not on the mind of most children, setting up a savings account early can help them be better prepared for the future. Parents can open a joint account—provided they can for a minor, which depends on statutory laws—where children can access the money in the account with the parents serving as the monitor. The main draw for a savings account would be for earning interest on money in these accounts, but with the COVID-19 pandemic impacting interest rates, earning interest will not be as fruitful as it was in generations past.
Beyond accounts, saving tangible money can have a greater impact on how children understand money. A 2018 University of Arizona study found that it helps children understand what money is, and the importance of saving, if they have hands-on experiences. Simply setting up a jar in the bedroom of a young child, and having them deposit coins helps them see what saving means. When they witness their coins pile up, children begin to learn that money can accumulate when it’s not immediately spent.
Dasha Petrenko // Shutterstock
Since children are not responsible for household budgeting and large financial decisions the way adults are, it can be difficult for them to grasp the concept of money. While planning for the future is typically not on the mind of most children, setting up a savings account early can help them be better prepared for the future. Parents can open a joint account—provided they can for a minor, which depends on statutory laws—where children can access the money in the account with the parents serving as the monitor. The main draw for a savings account would be for earning interest on money in these accounts, but with the COVID-19 pandemic impacting interest rates, earning interest will not be as fruitful as it was in generations past.
Beyond accounts, saving tangible money can have a greater impact on how children understand money. A 2018 University of Arizona study found that it helps children understand what money is, and the importance of saving, if they have hands-on experiences. Simply setting up a jar in the bedroom of a young child, and having them deposit coins helps them see what saving means. When they witness their coins pile up, children begin to learn that money can accumulate when it’s not immediately spent.
Children learn the value of saving when they can also practice how to spend those precious pennies on something of their choosing. Take a trip to the store, and talk about how much the items they’re interested in cost. For young children who haven’t had much experience yet with arithmetic, it can help to link the numbers on a price tag to how long it took to earn or save that amount. “This toy is worth what it took to earn in one week’s allowance,” for example.
Choosing whether to purchase helps children develop control and learn to spend wisely as they mature. For older children who are inundated with temptation both in physical stores and online, ask them to wait one day before buying. With that 24-hour pause, they may decide an item isn’t worth their spending budget.
Monkey Business Images // Shutterstock
Children learn the value of saving when they can also practice how to spend those precious pennies on something of their choosing. Take a trip to the store, and talk about how much the items they’re interested in cost. For young children who haven’t had much experience yet with arithmetic, it can help to link the numbers on a price tag to how long it took to earn or save that amount. “This toy is worth what it took to earn in one week’s allowance,” for example.
Choosing whether to purchase helps children develop control and learn to spend wisely as they mature. For older children who are inundated with temptation both in physical stores and online, ask them to wait one day before buying. With that 24-hour pause, they may decide an item isn’t worth their spending budget.
Developing saving habits early, and with goals in mind, can make debt seem less daunting in the future. Starting a college fund is especially valuable, not just because of soaring tuition costs, but because experts find children will feel ownership in their college education. Even younger children who earn money from allowance or their own entrepreneurial efforts can carve out a portion to put away for college.
By saving earlier for college, children can avoid taking on too much student debt. But, while saving will minimize debt in the future, with decreasing interest rates for bank accounts and rising tuition costs, it will likely not guarantee debt-free higher education—especially if a college degree ends up costing $500,000 by 2030.
Prostock-studio // Shutterstock
Developing saving habits early, and with goals in mind, can make debt seem less daunting in the future. Starting a college fund is especially valuable, not just because of soaring tuition costs, but because experts find children will feel ownership in their college education. Even younger children who earn money from allowance or their own entrepreneurial efforts can carve out a portion to put away for college.
By saving earlier for college, children can avoid taking on too much student debt. But, while saving will minimize debt in the future, with decreasing interest rates for bank accounts and rising tuition costs, it will likely not guarantee debt-free higher education—especially if a college degree ends up costing $500,000 by 2030.
Once your children have experienced accumulating money in their piggy banks, or adolescents begin earning money, parents can take a hand in helping them prioritize what they’ll do with those dollars.
A 2018 study from Brigham Young University found early experiences with money management are linked to more savings and better credit as adults, along with parents serving as positive financial role models. Cash that can be divided and earmarked for various purposes helps young children visualize what budgeting means. This also helps them carry these habits into the future. And as money management will be increasingly conducted digitally, using budgeting apps when financial planning with your child may also be fruitful.
People Image Studio // Shutterstock
Once your children have experienced accumulating money in their piggy banks, or adolescents begin earning money, parents can take a hand in helping them prioritize what they’ll do with those dollars.
A 2018 study from Brigham Young University found early experiences with money management are linked to more savings and better credit as adults, along with parents serving as positive financial role models. Cash that can be divided and earmarked for various purposes helps young children visualize what budgeting means. This also helps them carry these habits into the future. And as money management will be increasingly conducted digitally, using budgeting apps when financial planning with your child may also be fruitful.
Grocery shopping with your children can be a great opportunity to teach them how to get the best value. Before you leave, clip coupons and explain that if you buy that featured item and hand coupons to the cashier, they’ll be able to save a little money for something else. And, when you’re searching shelves, point out the price of different brands for the same products. Calculating the cost per weight or ounce is another good lesson in pricing differences while also sharpening their math skills.
Monkey Business Images // Shutterstock
Grocery shopping with your children can be a great opportunity to teach them how to get the best value. Before you leave, clip coupons and explain that if you buy that featured item and hand coupons to the cashier, they’ll be able to save a little money for something else. And, when you’re searching shelves, point out the price of different brands for the same products. Calculating the cost per weight or ounce is another good lesson in pricing differences while also sharpening their math skills.
As early as they’re able to perform simple chores, like putting away toys in a bin, children can learn that money can be earned—even if the paycheck comes from their parents in the form of allowance. More than four out of five parents believe providing an allowance should come with some exchange of labor, according to a 2019 study from the Association of International Certified Professional Accountants.
Since many children are enthusiastic to earn money from their own efforts, they might also find opportunities for babysitting, shoveling snow, watering gardens, and more. Parents can help them scout out opportunities that may be open to them in their neighborhood. Part-time employment, like being a lifeguard or store clerk, becomes available when teens are legally eligible to work. Here again, parents can help them decide whether it’s worth it to take a certain position, or if they might make and learn more with their own gig.
New Africa // Shutterstock
As early as they’re able to perform simple chores, like putting away toys in a bin, children can learn that money can be earned—even if the paycheck comes from their parents in the form of allowance. More than four out of five parents believe providing an allowance should come with some exchange of labor, according to a 2019 study from the Association of International Certified Professional Accountants.
Since many children are enthusiastic to earn money from their own efforts, they might also find opportunities for babysitting, shoveling snow, watering gardens, and more. Parents can help them scout out opportunities that may be open to them in their neighborhood. Part-time employment, like being a lifeguard or store clerk, becomes available when teens are legally eligible to work. Here again, parents can help them decide whether it’s worth it to take a certain position, or if they might make and learn more with their own gig.
Teens who are enthusiastic about a hobby or task might be able to turn it into a business. If your teens enjoy sports and like young children, they can think about beginning a summer sports day for neighborhood children or serving as a referee for local recreational sports.
As of early 2022, some 336 cities participate in ACTON business fairs. At these fairs, which are often located in parks or community centers, many children display their own businesses and sell their wares. Teens that are serious about making their business work may be able to tap a mentor through SCORE, a nationwide network of experienced volunteers who can help aspiring entrepreneurs with feasibility plans.
Suzanne Tucker // Shutterstock
Teens who are enthusiastic about a hobby or task might be able to turn it into a business. If your teens enjoy sports and like young children, they can think about beginning a summer sports day for neighborhood children or serving as a referee for local recreational sports.
As of early 2022, some 336 cities participate in ACTON business fairs. At these fairs, which are often located in parks or community centers, many children display their own businesses and sell their wares. Teens that are serious about making their business work may be able to tap a mentor through SCORE, a nationwide network of experienced volunteers who can help aspiring entrepreneurs with feasibility plans.
Early on, introduce your child to investing by taking them to the bank to open a savings account. Showing kids how a savings account earns interest can help teach them how different investments can yield different returns.
Of course, any investing lesson should include warnings about the possibility of losing money, too. Start by talking with your children about a possible company you can all invest in; perhaps it’s a company that provides a product or service they love. Then, trace the prospects of that particular firm by looking at the price chart for that stock.
Maria Sbytova // Shutterstock
Early on, introduce your child to investing by taking them to the bank to open a savings account. Showing kids how a savings account earns interest can help teach them how different investments can yield different returns.
Of course, any investing lesson should include warnings about the possibility of losing money, too. Start by talking with your children about a possible company you can all invest in; perhaps it’s a company that provides a product or service they love. Then, trace the prospects of that particular firm by looking at the price chart for that stock.
Trips to the store pose many teachable moments. In addition to comparing prices, explaining why you’re waving a plastic card at check-out—whether debit or credit—helps children learn the difference between paying now or later. Share why you might be choosing a credit card and explain the interest charges for delaying payback.
For example, you might not want to purchase a new computer in cash because you had other important expenses that month—such as utility bills or car payments—but you’ll have the funds next month to pay the purchase off. You might add how using credit impacts your credit score, which is like a report card that credit bureaus keep on individuals. These lessons show that borrowing isn’t inherently bad, but that you need to have a reasonable plan to pay everything back.
Andrii Iemelianenko // Shutterstock
Trips to the store pose many teachable moments. In addition to comparing prices, explaining why you’re waving a plastic card at check-out—whether debit or credit—helps children learn the difference between paying now or later. Share why you might be choosing a credit card and explain the interest charges for delaying payback.
For example, you might not want to purchase a new computer in cash because you had other important expenses that month—such as utility bills or car payments—but you’ll have the funds next month to pay the purchase off. You might add how using credit impacts your credit score, which is like a report card that credit bureaus keep on individuals. These lessons show that borrowing isn’t inherently bad, but that you need to have a reasonable plan to pay everything back.
Helping children with their money management skills pays many benefits. Besides imparting practical lessons like how savings can earn interest or credit cards aren’t a plastic magic wand, parents show children how values figure into money management.
Tell children why you support various causes or groups, and how you try to balance your money between what the family needs now and what will be needed later. Have children earmark their own dollars by talking through their personal priorities with you. Maybe they are concerned about the environment, and they want to contribute to a clean ocean fund. Or, by discussing what they spend money on weekly, they may decide forgoing a treat is worth it if they’re building a new bike savings fund. You’ll be showing that future needs and supporting worthy causes are as important as the gratification of spending now. The patience, generosity, and emotional control a child develops through an early, healthy relationship with money will pay lasting dividends.
This story originally appeared on GoHenry and was produced and distributed in partnership with Stacker Studio.
A3pfamily // Shutterstock
Helping children with their money management skills pays many benefits. Besides imparting practical lessons like how savings can earn interest or credit cards aren’t a plastic magic wand, parents show children how values figure into money management.
Tell children why you support various causes or groups, and how you try to balance your money between what the family needs now and what will be needed later. Have children earmark their own dollars by talking through their personal priorities with you. Maybe they are concerned about the environment, and they want to contribute to a clean ocean fund. Or, by discussing what they spend money on weekly, they may decide forgoing a treat is worth it if they’re building a new bike savings fund. You’ll be showing that future needs and supporting worthy causes are as important as the gratification of spending now. The patience, generosity, and emotional control a child develops through an early, healthy relationship with money will pay lasting dividends.
This story originally appeared on GoHenry and was produced and distributed in partnership with Stacker Studio.
A 529 plan can pay for up to $10,000 a year for tuition at K-12 schools. MoMo Productions/DigitalVision via Getty Images
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