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529 Plans Are Becoming More Popular, and Here Are 3 Reasons to Open One

By Maurie Backman - Nov 17, 2016 at 8:18AM

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There's a reason a growing number of Americans are saving for college with 529 plans. Here are some of the benefits they offer.

With the cost of college rising faster than inflation, more and more Americans are coming to realize the importance of saving early and efficiently. In fact, Fidelity Investments reports that 72% of U.S. families are currently saving for college. Not only that, but since 2007, there's been a 62% increase in the use of 529 plans as a college savings tool. As of 2016, 41% of families who put away money for college are using 529s to help meet their goals. And according to the College Savings Plan Network, the average 529 balance is now at a record high of almost $21,000. 

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If you're serious about making a large dent in your child or grandchild's college tuition, it's time to consider the benefits that 529 plans have to offer. Here are three major advantages to opening a 529 today.

1. Tax-deferred growth

Though you won't get a tax break on the money that goes into a 529, once your account is funded, your money can grow tax-free. In fact, you'll never pay taxes on your earnings provided you use the money for qualified education purposes. Furthermore, some states currently offer residents tax deductions or credits for contributing to a 529. Now to take advantage of these up-front tax breaks, you'll need to choose a plan offered by your home state, and depending on where you live, it might pay to forego the tax benefit and pick an out-of-state plan with lower fees and higher returns. But even if you don't get any state tax benefits, you'll still enjoy tax-free growth on your investments.

2. Better returns

Growing your money is an essential part of tackling the cost of college, and 529 plans offer a huge advantage over traditional savings accounts in this regard. These days, you might earn 1% interest on your money in a savings account if you're lucky. With a 529, you might earn five times as much even when you consider the fees these plans typically come with.

Let's say you save $200 a month for college over the course of 15 years. If you're getting just a 1% return, you'll wind up with roughly $38,000 after all is said and done. But if you stick that money in a 529 plan that gives you an average annual 5% return, after 15 years, you'll have close to $52,000. That additional $14,000 could easily buy you an extra year of in-state college tuition at today's rates.

3. More flexible rules

One major downside to 529 plans is that if you withdraw money for non-qualified purposes, you'll be hit with a 10% penalty. What this means is that if you overfund your 529 and don't wind up needing as much as you've saved for college, you risk incurring a penalty on the remainder of your savings.

Thankfully, new 529 rules make it easier to find legitimate ways to spend that money. As of this year, computers and related equipment count as qualified expenses, just like tuition, books, and fees. Furthermore, the new rules allow plan holders to redeposit money back into an account without penalty as long as the money goes back in within 60 days. This added flexibility can really help in situations where a student needs to withdraw from school after paying tuition.

Of course, 529 plans aren't for everyone, and they do come with certain limitations. On the other hand, 529 plans have gotten more user-friendly over the years. When you choose a 529, you can change your plan beneficiaries at any time, and you won't be subject to income limits, age limits, or annual contribution limits.

If you're hoping to fund a college education one day, be it for your children or grandchildren, it pays to look into your options for opening a 529. Though every plan is different, the right one could make college far more affordable than you'd imagine.

 
 
 

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