Is a 529 better than a savings account for a child?
529 Plan v. Savings Account. A 529 plan's main benefits are tax-deferred growth, more growth potential, and tax-free withdrawal for qualified education expenses. A 529 Plan can be invested into ETFs or target date funds which can offer more growth opportunities compared to a lower interest-earning savings account.
Earmarking your money for something specific, like education, can help motivate you to keep saving. But the tax advantages are the main reason 529 plans stand out from regular savings accounts. On top of tax-free growth, some states allow taxpayers to deduct or get a credit for 529 plan contributions on their taxes.
Only certain education expenses qualify, so you need to make sure you're withdrawing money for qualifying expenses to avoid taxes. If you use 529 savings plan funds for non-qualified withdrawals, they may incur a 10% penalty. And they may be subject to federal income tax.
Custodial accounts can have a heavy impact on financial aid. Because the money in a custodial account is your child's asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college. Compare this to 529 plans, which are given more favorable treatment for financial aid.
Yes, a 529 plan is a great option to save enough money for college. There are tax benefits that are hard to compete against by the other college savings options because it was created to benefit those saving for education.
| Category & Winner | Interest Rate |
|---|---|
| Capital One Best Overall | 2.50% APY |
| USAlliance Financial Best for Young Children | 2.00% APY on first $500 |
| Alliant Credit Union Best for Teens | 3.10% APY when you have $100 or more |
| Spectrum Credit Union Best for Maximum Interest | 7.00% APY on first $1,000 |
Not to worry. Money in a 529 account can be used tax-free for many types of schooling, not just expenses at a four-year college. And there are several ways you can use those savings, even if your child doesn't pursue any type of higher education. There's also no time limit on using the funds.
It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.
There are no yearly contribution limits to a 529 plan like certain retirement accounts. However, each state has a different aggregate contribution limit for each 529 account, typically between $235,000 and $550,000.
Is a Roth IRA better than a 529 plan? A 529 savings plan is generally an all-around good choice to pay for your child's (or your own) college, while a Roth IRA may be a better option as a backup account to supplement educational expenses.
What happens to 529 when child turns 18?
Time and Age Limits on 529 College Savings Plans
There are no time or age limits on using a state 529 college savings plan. Money can be kept in a 529 plan indefinitely. 529 plans can be used for graduate school, not just undergraduate school, and can be passed on to one's children.
So, who should be the owner of the student's 529 plan? Of course, it all depends on individual goals and circ*mstances. There is no catch-all or one-size-fits-all approach, especially when trying to plan up to 18 years in the future.
| Age | Low End | High End |
|---|---|---|
| 12 | $20,251 | $133,151 |
| 13 | $22,689 | $149,179 |
| 14 | $25,277 | $166,196 |
| 15 | $28,025 | $184,263 |
| Average amount saved for college | |
|---|---|
| Age 0 – 6 | $7,929 |
| Age 7 – 12 | $15,359 |
| Age 13 – 17 | $27,559 |
| Age 18+ | $27,778 |
You know the saying, “It's never too late…” Truly, it's never too late to save for your child's college education in a 529 plan, even if it's their senior year of high school. Why? 529 plans offer many benefits to enhance the growth of funds placed aside for future college costs—even if the future is 2021.
- 529 education savings plans.
- Roth IRAs.
- Coverdell education savings accounts.
- Brokerage accounts.
- Traditional savings accounts.
9 years old is a great age for a savings account
Most checking accounts come with a debit card; it's up to you whether to connect checking and savings accounts so your child can access both accounts.
If your child's interest, dividends, and other unearned income total more than $2,500, it may be subject to a specific tax on the unearned income of certain children. See the Instructions for Form 8615, Tax for Certain Children Who Have Unearned Income for more information.
A 529 plan is a great way to save for your little one's education, but it isn't the only way. You could put some of your college savings in a 529, some in a traditional savings account, and sprinkle a little more into a Roth IRA.
Starting in 2024, beneficiaries of 529 college savings accounts are permitted to do a tax-free rollover to a Roth IRA.
What is the best way to save for my child's future?
- Create a College Savings Plan. ...
- Start a 529 Plan for your Kid. ...
- Create a Trust Fund for Your Kid. ...
- Create an Investment Account for Your Kid. ...
- Create a Retirement Account for Your Kid.
You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records.
529s count against you for federal aid
College is expensive enough without doing things that minimize the amount of free money that you can receive. And a 529 plan can count against you in the calculations that determine your eligibility for aid.
A 529 college savings plan offers a tax-free way to save for college. There are two major ways that wealthy Americans are making the most of their 529 plans. One big takeaway for the average saver: save early and save often.
You can keep the money in the 529 account in the case your kid decides to pursue college or a graduate degree in the future. There is no requirement to withdraw funds at the age of 18–the money can remain in the plan indefinitely as long as there is a living beneficiary.
