Navigating College Savings: The 529 Plan Explained

EP 137 - Navigating College Savings: The 529 Plan Explained

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Introduction to College Savings Stress

 Hey there friends. Do you ever stress about how you'll pay for your child's or your grandchild's college education? Do you wish there's a way to start saving now that would help cover those huge tuition bills that you know are coming down the road.

Exploring the 529 College Savings Plan

Well today, I want to share with you one powerful option that exists. That's the 5 29 college savings plan stick around until the end to learn the basic of how these plans work, what the main benefits are and what to watch out for. Education costs are soaring. So being strategic in savings is the key. Alrighty folks. Let's dive right in.

Welcome to the Ask Ralph Podcast

Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.

Ask Ralph makes the complex simple by sharing his real world [00:01:00] knowledge from a Christian perspective with all things financial. Now here's your host, Ralph Estep, Jr.

Tax Talk Thursday Show Begins

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Grounding Financial Conversations in Faith

We're going to be talking about finances today. That's what we do on the show, but I want to ground our conversation first in God's word.

So here's a verse from Proverbs chapter 13, verse 11. It stood out to me as I was preparing for this topic. And it goes like this. Dishonest money dwindles away. But whoever gathers money, little by little makes it grow saving for college is definitely an exercise in gathering money, little by little and making it grow. When we're disciplined and consistent over many years, the results can be powerful. This passage reminds me that God honors diligence and wise planning when it comes to money.

All right, let's see how we can apply that mindset to college savings. Let's get into some details today.

Deep Dive into 529 Plans: Benefits and Drawbacks

In a nutshell, a 529 plan is a tax advantaged investment account designed specifically to help families invest for future college expenses. 5 29 plans are [00:03:00] usually organized at the state level, but participation is open to anyone nationwide. Each state partners with an investment company to manage their plans.

So how do these accounts work Ralph? Well, essentially you open a 5 29 account and you contribute money regularly, just like you would in any investment account. The money's invested based on your chosen portfolio and your allocation of those funds, you get to pick from a preset set of options provided by the plan. As your contributions grow over time. You can eventually withdraw the money. Tax-free that's the key to pay for college costs when they're needed the name 5 29 is not magical. It comes from the section of the tax code that authorized these plans back in 1996. When they were created, but they become much more popular and well-known in the past five to 10 years, you may have heard about these. So let's look at some of the key benefits of using a 5 29 plan to save for college.

First, your money grows tax deferred. You don't pay taxes on any gains each year. Like you would in a normal investment [00:04:00] account. Instead taxes are deferred until money is withdrawn. When you go to use it for college.

And this leads to the second big benefit. Tax-free withdrawals. When you take money out to pay for college expenses, you don't pay any federal or state income tax on those withdrawals. That's huge. My friends, this benefit supercharges your savings ability compared to your normal investment accounts.

And thirdly, 5 29 plans offer high contribution limits over $300,000 in some states. So you can sock away a lot of money for college over the years.

And fourthly, there's an estate planning flexibility component to this. If your child ends up not needing the money, you can transfer the account to another family member pretty easily with absolutely no penalties

and fifth, some states offer a state income tax deduction or even a credit for contributing to their 5 29 plans. You've. Got to make sure you check to see if that benefit happens in your state. I'm in Delaware. We actually don't offer that, but just next door in [00:05:00] Maryland, they do.

So in summary tax deferred growth tax free withdrawals for college costs, high limits. Estate planning options and potential state tax breaks. Those are some stellar benefits. My friends. But 5 29 plans. Aren't perfect. And I always want to give you the other side, so let's talk about some potential drawbacks.

First your investment options are limited to what the state plan offers. You can't invest in just any mutual fund or stock like you could in a normal brokerage account. You're going to be set with what the state plan offers you to do.

Secondly, there are penalties for non-qualified withdrawals. If you take the money out for non-college expenses before age 59 and a half, you're going to pay a 10% penalty plus income tax on whatever. That portfolio has gained.

Thirdly, 5 29 plans are not free. Let me repeat that. They are not free there. There are management fees charged by the fund companies that manage the plan These vary state by state, but are usually reasonable, still it's an extra cost. So you want to shop around.

[00:06:00] Fourth, some financial aid formulas may count 5 29 assets against you more than other assets. So large balances could potentially impact how much aid your child or grandchild qualifies for

and fifth. 5 29 investment options tend to be conservative and they follow market trends. So while they're reliable, you may not see sky high returns. So there's some factors to consider if you're thinking about using a 5 29, but for most families, The tax benefits outweigh the drawbacks.

Action Steps for Opening a 529 Plan

So let's talk about some action steps. You know, I always want to give you action steps that you can work on.

So if you want to look into opening a 5 29 plan, here's some specific steps to get started. You want to research your state's plan options and investment choices. See if they offer any state tax benefits, check out plans from other states to you could open a plan in any state, not just your home state. Compare investment options and costs those management fees and see what you can do from state to state.

Estimate how much money you may need to [00:07:00] save. Based on current college costs. Many plans have calculators to help you do that, and then decide on recurring contributions that fit your budget. Hey folks, even $25 a month is a great start. You then want to select your investment portfolio based on risk and return levels. You're comfortable with. Each plan does have, aggressive and then maybe more conservative plans and then go and open an account online and set up automatic contributions. And then make it a habit. You want to make sure you review your account periodically and adjust contribution or investments if needed you have, you're seeing those prices of college go up and you don't have as much as you'd like to have in there. Make sure you. Give it a supersize.

Visit askralphpodcast.com and search for 5 29 to find all of our past episodes on this topic to the investment world can seem complicated, but taking one step at a time to educate yourself makes all the difference.

Recap and Closing Thoughts on 529 Plans

All right, friends. Let's recap. What we learned today, about 5 29 college savings plans. 5 29 plans are tax based. Investment accounts [00:08:00] designed for tax advantage college savings. The money grows tax deferred and can be withdrawn tax free for college expenses. These have high contribution limits, estate planning, flexibility. And potential state tax breaks.

Remember there are limited investment options, penalties for non-qualified use. And there are some costs, which is a big drawback. But you need to take time to research plans and start with recurring contributions that fit your budget.

And remember this compounding growth over many years is powerful with 5 29 plans. So even when you start, let's say your kid's a year old, putting that $25 a month in can really grow. So I hope this overview gives you a great starting point for considering whether a 5 29 account. Could be useful for your family's college planning. Education costs are only going to increase folks. So having a tax smart saving strategy is key.

Feel free to visit askralphpodcast.com to explore this topic further. And do me a favor, share this episode with others who may [00:09:00] benefit from learning about 5 29 plans. Well, God bless you. Friends. Stay tuned for more practical faith-based financial advice headed your way soon. Have a great day.

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