Three reasons why 529 plans remain popular

Three reasons why 529 plans remain popular

The back-to-school season can be a good time to talk about college savings. As many parents would attest, before you realize it, back to school means back to college.

A 529 college savings plan remains one of the most popular vehicles for saving for college costs, largely due to the ease of account creation, flexibility, and the tax advantages that are unique to this plan.

Assets have grown significantly in the past five years alone, representing an annualized increase of over 15% per year. Contributions have continued to rise. According to the College Savings Plans Network, total contributions into 529 plans rose to $21.2 billion in 2012, from $19.7 billion in 2011.

There are many reasons why parents choose a 529 college savings plan. Here are three:

1. Anyone can contribute. Parents, grandparents, aunts, uncles, and friends can all contribute to the account.

2. Account flexibility. If a child decides not to attend college, you can change the beneficiary to another family member, including yourself. You can also make this change multiple times during the life of the account.

3. Tax advantages. While the account is invested, you pay no federal income taxes on the earnings and no federal income taxes when you withdraw the money for college expenses. In addition, a special gift tax exclusion enables you to make five years’ worth of gifts to a single beneficiary in one year without triggering the federal gift tax.

Borrowing has costs
While it can be challenging to save for future college costs, it may be even more difficult for graduates to manage the student debt they have accumulated by going to college. This year, total student debt reached a record of nearly $1 trillion, according to the Federal Reserve Bank of New York.

Still, there are many ways that parents choose to save for college. A 529 college savings plan is one of the leading vehicles, but families also rely on investments, general savings accounts, and even retirement assets. Planning for college is like other financial planning activities, and professional advice is generally a good place to start. A financial planner or tax specialist can help families compare 529 plans with other investment vehicles designed for college savings.


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