For over 40 years, American families have dealt with stagnant wages and an ever-increasing cost of living. This presents a challenge for those families with children who must decide the best way to save for big-ticket expenses like higher education. With a multitude of options to choose from, many families ask, “Where should I invest my child’s money?”
The answer to the question depends on what you want to put your child’s money toward. If higher education is the answer, then you should consider investing your child’s money in a 529 plan. These plans are an effective means of putting money away now for higher education costs later.
Sootchy is here to help. Please download our app if you would like to start investing in a 529 college savings plan for your kids.
Why You Should Invest Your Child’s Money in a 529 Plan
The Securities and Exchange Commission explains (1) that a 529 plan is a “tax-advantaged savings plan” specifically created to encourage families to save for future higher education costs. Most states offer these plans in two distinct versions. A 529 pre-paid tuition plan allows parents to pre-pay tuition at current rates instead of being subject to excessive tuition inflation in the future. Alternatively, a 529 savings plan is designed to function as an actual investment vehicle, allowing families to grow their initial investment in the market. 529 savings plans are administered by financial professionals who specialize in managing long-term investments.
Benefits of 529 Plans
There are several benefits provided by 529 plans, chief among them being incomparable tax benefits. Money earned within a 529 account is not subject to federal income taxes. Moreover, money withdrawn from a 529 plan to pay for qualified higher education costs will also not be subject to taxes. This means that American families can use 529 plan earnings to finance as much as $10,000 in higher education costs annually tax-free. Additionally, over 30 states offer either partial or full tax deductions or credits toward 529 plan contributions.
529 plans also allow an account holder to exercise complete control over the funds within the account. In other words, the beneficiary of a 529 account does not retain a legal right to its funds, meaning that parents can ensure that money accrued in a 529 plan is actually spent on higher education costs.
Furthermore, the funds in a 529 plan do not impose much of a penalty when it comes to applying for financial aid. Although 529 plans count as a student asset, FAFSA only weights them at 5% when calculating the amount of financial aid a student will be offered. In other words, your child can possess a 529 account flush with funds and still qualify for an adequate amount of financial aid. Lastly, you can open multiple 529 plans in different states to invest your child’s money. This allows families to pick and choose the plans that they are most comfortable with – even it means investing across state lines.
Expenses that 529 Plans Can Pay For
Higher education costs cover far more than just tuition. Here is a brief list of other entities that are classified as qualified higher education expenses:
- Tuition
- Fees
- Books
- Supplies
In some cases, earnings from a 529 savings plan may even be eligible for payment on room and board, a cost that can be immense.
Comparing a 529 Plan to Other Ways to Invest Your Child’s Money
There are alternatives to a 529 plan, although they do come with drawbacks. For instance, parents might consider opening a custodial investment account to invest their child’s money. These accounts are offered as either a Uniform Gifts to Minors Act Account (UGMA) or a Uniform Transfers to Minors Act Account (UTMA). While similar to a 529 plan, some key differences should be noted.
When compared to UGMAs and UTMAs, 529 plans provide families with a clear advantage in tax benefits. While 529 plans offer families tax-free growth, custodial accounts are subject to several potential taxes, including unearned income after the first $1,100 being taxed. Additionally, these taxes rise as the funds within a UGMA or UTMA grow.
Another key difference is who maintains control of each account. In the case of a custodial account, a child will gain complete control once they reach legal age, 18 in some states and 21 in others. This means there is no guarantee that the money in a custodial account will be spent on higher education costs. 529 plans avoid this risk by providing account holders with complete control over the funds.
Also, qualifying for student financial aid with UGMAs and UTMAs falls far short of the advantage that a 529 plan provides. Custodial accounts can reduce the amount of financial aid by as much as 20% to 25% due to the way FAFSA weighs them in aid calculations. As mentioned before, a 529 account is only weighted at 5%.
Lastly, parents can change the beneficiary on a 529 plan. This is not the case with a UTMA or UGMA, both of which require the account beneficiary not to change once the account is opened.
The Sootchy App Makes It Easier Than Ever To Invest In 529 Plans
Figuring out where to invest your child’s money can be a challenging task. But if you have already decided on opening a 529 plan, the Sootchy app makes things easy. You can open the account and receive gifts from friends and family - it has never been easier for relatives to help out with paying for your child’s college education.
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