Hi, I'm Chadd Peachey. Thanks for tuning into the Financial Success Academy.
In this episode, we will discuss the basics of 529 college savings plans. Qualified tuition plans, or 529 plans, are tax-advantaged savings plans sponsored by government agencies or educational institutions. They're among the most popular ways to save for education expenses, allowing parents, friends, and relatives to contribute to a child's future education.
They are offered as either prepaid tuition plans, Like the Washington GET program, or conventional college savings plans. Conventional 529 college savings plans are more popular and for good reason, as they offer more advantages and flexibility for college savers. There are no annual contribution limits to 529s; however, there may be gift tax implications if you contribute over a certain amount per year. Gift tax limits are still quite generous, and under normal circumstances, most people are unaffected by them.
From an income tax perspective, contributions are not deductible at the federal level. However, they grow tax-free, and withdrawals come out tax-free as long as they are used to pay for qualifying education expenses. Some examples of qualified expenses are tuition, room and board, computers, and meal plans.
Plan options and tax benefits vary from state to state, and you can use most states' 529 plans even if you don't live in that state. Because of the opportunity for tax-free growth, establishing these accounts early in a child's life can dramatically reduce the amount you need to save to cover future costs. Even small sums set aside regularly overtime make higher education more affordable.
Each dollar saved is a dollar you or your child don't need to borrow and repay with interest. Should you decide to use the money for something other than qualified education expenses, you may have to pay income taxes plus a 10% penalty on the earnings portion only. Your contributions are never subject to tax or penalty since they were contributed after-tax.
In another video, we will address a few specific circumstances that will allow you to take a distribution without the 10% penalty.
If you're interested in opening a 529 plan, two options you may want to consider are my529 and the Vanguard 529 plan. These two plans frequently rank among the top 529 plans in the country.
Saving for your child's college education should be a financial priority. Please give us a call, and we can make sure to incorporate that into our financial planning meetings.
We hope you found this video helpful. Stay safe, and thanks for tuning in.