How to Use a 529 Plan to Improve College Savings

It used to be that saving for college was a relatively simple process: if you wanted to save for your child’s college education, you put money away wherever it was convenient. Now, though, there are several types of specific savings plans that offer you benefits that your old coffee can’t compare with. They may not be as convenient, but when your child is ready to start college, there will be more money available. Of these plans, a 529 plan offers some significant ways to improve on your college savings options.

Investment Plans Versus Savings Accounts

Saving for college in a savings account means that you’ll earn interest on any money you deposit. But, in the grand scheme of things, that interest won’t add up to much. 529 Savings Plans aren’t savings accounts, though, and they offer an opportunity to earn more money. They’re set up like 401(k)s or IRAs: the money you contribute to the plan is invested in mutual funds or similar investments. There is a risk, of course, that the value of those investments could go down between now and the date when your child is ready to start school, but most 529 plans do take conservative approaches to investing.

There is a second type of 529 plan that can pay off even more than an investment can. A 529 Prepaid Plan lets you pay for future college costs at today’s prices. Given the fact that the cost of college has far outpaced inflation and doesn’t look to be slowing down any time soon, taking that option could make for a pretty significant financial boost when your child is ready for school. Because 529 plans are operated by individual states, the prepaid tuition is usually set up to work with in-state schools. However, most plans do offer options for converting that money to be used at private and out-of-state colleges.

Automating Your Savings

Most 529 plans require that, in order to enroll, you have to set up an automatic monthly payment. Such a set up ensures that you’re actually contributing money to the account regularly, which isn’t true for many of other college savings options. You can, of course, contribute more with one-time payments, but having an automatic withdrawal set up makes the entire process easier. There’s an added benefit if you have a relative who wants to help contribute to the plan, as well: anyone can either make one-time payments or set up automatic withdrawals.

The Tax Benefits

Any contributions you make to a 529 plan grow tax-deferred and, as long as the money is used towards college expenses, withdrawals are tax-free. If that doesn’t make a big enough difference, many states offer additional tax benefits as well.

Not only can you create an automatic savings plan to put away money for your child’s education with a 529 plan, but you can increase that money and minimize the taxes you pay on it, all at the same time. It’s worth checking into the specifics of the plans offered in your state to find the best plan for your family.