It’s that time of year; students are headed back to school and we are once again reminded that another year of the educational timeline has begun.
For parents, it only gets more expensive as the years tick by and approach the most expensive time of our educational years; college. As in many other aspects of our lives, the best way to confront this challenge is by being prepared.
A common way to save for your child’s future educational expenses is a 529 plan. There are various types of 529 plans available and they differ in each state, but generally a 529 plan is a way to save for a child’s education tax-free. The gains on 529 plans are tax-free when the funds from a 529 are used to pay tuition expenses. While 529s are flexible in that if your child decides not to go to college the beneficiary can be changed, the funds must be used for educational expenses including tuition, room and board, books, fees and supplies.
529s also cover one of the biggest mistakes a parent can make in saving for their child’s education, saving money in the wrong person’s name. A federal formula decides how much financial aid a student receives and in this formula there are protections in place for assets in a parent’s name that do not exist in the case of the same funds being in a student’s name. That means that if there is $10.000.00 in a student’s savings account, the student’s expected contributions could be up to 20% while the same amount of money in a parent’s account could be as low as 6%.
Your accountant can help your decide what kind of college savings account is best for you and your financial needs.