Getting a head start for your child's education savings not only eases the burden on you as a parent, but provides an extra benefit for your child by eliminating or reducing the amount of student loan debt they may face.
I highly encourage the use of a 529 for multiple reasons:
Tax Savings:
Earnings in a 529 account, unlike those in a taxable account, are free from federal and, in many cases, state taxes provided they’re used to pay a broad range of qualified educational expenses.
Certain states actually provide a tax deduction for contributions made to a 529 plan. California currently does not provide this, but there are proposals in California's legislature to change this.
Below is a chart that illustrates the benefits of the favorable tax treatment a 529 plan provides by not taxing the growth.
Compounding:
Without a doubt, the most powerful force used to grow an account. The earlier you start, the more opportunity this compounding effect has. By having the account's growth grow upon itself and again and again, etc… it doesn’t take much before this force has a profound effect on your account balance.
Budget-Friendly:
These accounts are designed to be opened with small dollar amounts and work perfectly with a recurring contributions (i.e. $25/month). And if you start early, it can easily fit into your monthly budget now with room to increase down the road.
Control:
The parent or account owner controls the account, not the child. This is advantageous in the event the child doesn't need the funds or demonstrates unfit financial responsibility. This ensures the funds used will be used for what they are intended for and prevents frivolous use of funds.
Goal Focused
These accounts are easily identifiable for a goal. It creates a purpose for the dollars being contributed and you know exactly what your dollars will be used for. Contrary to a typical savings account which you can be tempted to invade, you know well in advance either the goal you are adding to or taking away from by making contributions or distributions. There's less likely a chance you would use these accounts for reasons other than education and this helps the account remain undisturbed.
While these are just a few, it becomes clear how useful this accounts can be.
Comments