College tuition is rising rapidly, about 6% each year. If it continues at its current pace, a public college education could soon cost upwards of $54,000 each year per child. For a family with two children in college simultaneously, that could be a bill north of 100k for one year.
With rising tuitions in mind, many parents have turned to a popular investing account, the 529b plan. With these plans come tons of information that can easily confuse most parents. What are the advantages of a 529b, and which plans are the best? That’s what we asked our experts. Here is what they said.
Advantages Of a 529b
There are several advantages to opening a 529b. Nathan Mueller (MBA) of BlackBird Finance says, “The main advantage of opening a 529 plan in any state is that you receive a tax advantage for saving for college in addition to the money being invested in some manner and growing.”
529b’s have a similar advantage shared with a Roth IRA in which the capital gains made from the account are not taxable income. Also, similar to a Roth IRA the contributions made to a 529b can be withdrawn tax-free and penalty-free. However, some earnings also need to be withdrawn, and the money withdrawn must be spent on educational expenses.
Depending on your state, you may also be able to deduct your 529b contributions from your state taxes. Dean Lyman (CFP) of Your Financial PartnerShip states, “Over 30 states do (allow it), and some require you to use their specific state 529 plan to claim the credit. So if it is offered and that credit is important to you, then the first plan you should look at will be your state plan.
Some states will offer even more. Lyman continues, “Seven states allow you to claim a tax benefit for contributions to any 529 plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, Pennsylvania. So if you live in any of these states, you can find the best plan for you regardless of state and still take advantage of the tax deduction.”
Best 529b Plans
Our experts agree that there isn’t always a “best” plan. However, many had the same thoughts as Brian Behl (CFP, CRPC, CDFA) of Behl Wealth, “The “best” 529 is likely the one for your state if there is a tax deduction for contributions.”
Each state can set their own rules for 529b plans. Some states offer a tax deduction of your contributions up to a certain amount, some offer a tax credit, and some offer no tax breaks. To help navigate these rules, Behl also pointed to a resource:
The site www.savingforcollege.com is a great resource showing the rules for your state. Savingforcollege.com also provides a site to find different plans that fit your criteria.
If your state doesn’t offer state tax benefits, there are still many good options.
Michael Reynolds (CSRIC, AIF, CFT-I) of Elevation Financial LLC puts the spotlight on one plan in particular. “If your state’s plan does not offer a 529 or the tax benefits are not important to you, you can open a 529 anywhere you want. For example, Utah’s 529 plan tends to be popular because it has a reputation for a great online portal, good customer service, and a variety of low-cost investment options. Many financial advisors recommend opening a Utah 529 plan if your state offers no tax deduction or credit. A 529b plan can be used for college in any state and is not tied to your specific location.”
Arch Financial Plannings’s Cecil Staton (CFP, CSLP) would agree with Reynolds stating, “My favorite plan in this category is Utah’s My529 plan. The plan fees are low, and the plan offers access to low-cost funds at DFA & Vanguard. Utah’s My529 plan also provides excellent flexibility to customize your asset allocation.”
With the rapid rise of college tuition, parents need to consider how to pay for this rising cost immediately after bringing a child into the world. Eighteen years will go by fast; without proper planning, you can fall behind quickly. 529bs offers many tax benefits both for the present and future.
Each state can be a bit different, but if your state offers the tax advantages, you should likely use its 529b plan. If your state does not provide tax benefits, our experts like the plans offered by Utah and Nevada for their ease of use and investment diversity.
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This post was produced by Have Your Dollars Make Sense and syndicated by Wealth of Geeks.
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Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, or just playing around with his kids.