These days, there's a lot of talk about student loan payments in the news. That's because monthly payments resumed in October after a multi-year pause.
If you don't want your children to struggle with having to repay student loans, then you may be eager to amass a nice-sized college fund for them. And you may be inclined to use a 529 plan to house that money.
The upside of funding a 529 plan is that your investments in that plan will get to grow in a tax-free manner. By contrast, investment gains in a traditional brokerage account are taxable year after year.
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But before you rush to open a 529 plan, you may want to explore different options. In fact, here are a few questions it's worth running through before you commit to a 529.
1. Am I sure my children want to go to college?
A 529 plan can be a great option when you have children with college tuition bills to pay. But before you stress yourself out over funding one of these accounts, have a talk with your kids about their higher education plans.
It may be that one of your children is hoping to start a business after graduating high school, while another wants to secure an apprenticeship for a specific trade. If you overfund a 529 plan, you'll risk being penalized on the gains portion of your account, so it's important to get a good sense of your kids' plans before going this route.
Now it is worth noting that starting in 2024, 529 plan holders will have the option to roll a limited amount of excess funds to a Roth IRA without incurring a penalty. So this change does make a 529 a bit less risky. But it's still worth talking to your kids about what they want before funding one of these accounts.
2. Have I researched different 529 plans?
You may be inclined to open a 529 plan that's sponsored by your home state. But that's not your only option. You don't have to choose a plan sponsored by your state of residence. And if there's no state-level tax incentive to fund that plan, then you may want to opt for a different one.
In fact, it's important to compare your 529 plan choices in terms of factors like fees and investment options. And also, read up on each plan's performance before making your selection.
3. Have I considered other places for that money?
You may like the idea of being able to save for college in a tax-free manner. But there's another plan you can use to sock money away for college and not pay taxes on investment gains -- a Roth IRA.
Now Roth IRAs do impose an annual contribution limit. There are technically no annual contribution limits for 529 plans, though contributions to these plans are generally considered to be gifts for federal tax purposes, so you'll want to be mindful of the gift tax exclusion.
But if you put your college savings into a Roth IRA and your kids opt out of college, you won't have to scramble to find a home for that money. It can simply be used for retirement instead.
A 529 plan may end up being a great choice for your college money. But before you open one, run through these important questions and research your options accordingly.
