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Why You Should Include 529 Plans in Your Financial Planning

August 19, 2021

With the school year fast approaching (or most likely beginning for many of you), this week’s blog will focus on the best ways to prepare for college expenses.  Many families are concerned about how they will help assist with college.  The general rule of thumb is that college expenses increase at about twice the inflation rate yearly.  This article shows a study conducted by CNBC using data from The College Board that showed an increase in college expenses of over 25% from 2008-20181.  Also, with more and more companies offering tuition reimbursements and discounts to pursue graduate-level degrees, these costs will continue to rise.  Establishing a 529 plan as part of your overall family financial plan is a great step to stay ahead of these costs.  These plans are tax-efficient and very versatile in ways you can use them.  Let’s look at a couple of ways these plans can add value to your overall strategy.


The most common benefit associated with a 529 plan is the fact that investment returns in the plan grow tax deferred.  Why is this a big deal?  Let’s say that couple A has a 529 savings plan and couple B puts the money in a retail investment account.  Both couples earn the same, have the same income tax rates, and earn the same amount of return on their investments in the plan.  Couple B will be taxed on the dividends and interest earned in the plan, and if they sold investments or changed things around, they will also owe tax on any gains they incurred.  However, Couple A will owe none of those taxes.  When it comes time to pay for the tuition bill, Couple B will owe taxes on the gains incurred from selling those investments, while Couple A will owe NO tax if the funds are being used for qualifying expenses.  We love to think about how great it would be if our income were not taxed.  A 529 makes that a reality for those paying for college!  If you are a diligent saver and have reached the cap on your yearly IRA contributions, putting some of that extra money in a 529 plan can help shelter some of those funds, even if they ultimately are not used for college.  How is that possible? 


529 plans are versatile in use, and savvy financial planners can use them to help save you money.  The funds are not taxed for qualified college expenses.  Things like tuition, books, supplies, computers, internet access, and room and board (for full time college students) all qualify for tax-free expense status2.  If you have multiple children, you can easily change the beneficiary on the plan to your second child if the first did not need all the funds in their plan.  Lastly, what happens if you set up these plans and your child decides that they don’t need the funds (e.g. they got a full scholarship to college paying all expenses).  If you don’t have anyone else that would need the funds, the funds you pull out of the 529 for nonqualified expenses are simply taxed at your normal income tax rate.  This means you can control how much comes out at a time, which gives you a leg up on controlling your tax bill!

After individual retirement accounts, 529 plans are the next most common investment vehicle we use when working with families with school age children.  It can be a huge relief to know that your child will be free to choose the future path they want with assistance and support.  Thanks for taking the time to read this blog!  If you want more information on how a 529 college savings plan fits within your financial strategy, please reach out to me here at the office, or schedule an in-person or Zoom meeting using the link below!  Enjoy your week!

Best wishes,


Mitch Bodenmiller

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