Local financial professional Ryan Wheless from Allied Wealth joined KPRC 2′s Owen Conflenti and Amy Davis on KPRC 2+ Friday to share his insights on 529 savings plans for education costs. Watch the full interview in the segment at the top of the page.
Here are some of his suggestions:
Q: WHAT IS A 529 PLAN?
- A 529 plan is a way to save specifically for education costs, but only 37% of families used this type of plan to help pay for college last year.
- The money you contribute grows tax-free and can be used at any time for qualified educational expenses including private school tuition for K-12, college tuition, room and board, books, computers, printers, internet service, as well as graduate schools, trade schools and apprenticeships.
- Anyone can contribute to a 529 plan and the contribution limits are high.
- I have a 529 college savings calculator on my website, alliedwealth.com, to help you get started.
Q: WHAT ARE THE TYPES OF 529 PLANS?
There are two main types of plans.
- This is the most common type of 529 plan.
- The person in control of the account will contribute money, and the account holder then chooses which mutual funds to invest that money in. Depending on how those funds do, your account can either grow or shrink.
- In addition to using the money for qualified educational expenses, the SECURE Act in 2019 expanded tax-free 529 withdrawals. You can now use those funds for registered apprenticeship program expenses and up to $10,000 in student loan repayment.
Prepaid Tuition Plans
- These plans are only offered in a few states and universities. They allow you to lock in your child’s tuition at current rates if they aren’t going to college for a couple of years.
- Like a savings plan, your money will grow over time and is tax-free.
- You can only use these funds for tuition and it is not available for K-12 education, unlike a savings plan.
Q. WHAT HAPPENS IF MY CHILD DOESN’T GO TO COLLEGE?
- Sometimes plans change!
- If your child decides not to go to school or ends up not needing the funds to pay for their education, be prepared to pay income taxes and a penalty for withdrawing the money.
- There are a couple of instances where the penalty could be waived:
- The beneficiary receives a tax-free scholarship
- The beneficiary attends a U.S. Military Academy
- The beneficiary dies or becomes disabled.
- The earnings portion will still be subject to federal and even state income taxes.
Q: HOW CAN WE BALANCE SAVING FOR OUR CHILD’S EDUCATION AND OUR OWN RETIREMENT?
- If you put off saving for retirement to save for your child’s education, you may regret it in the long run.
- We recommend saving 10-15% of your salary in your sponsored 401(k) plan. If you can’t manage that, you need to be contributing at least enough to get the company match.
- At Allied Wealth, our comprehensive retirement planning process gives clients confidence their retirement savings will last.
- Just like you are rooting for your own kids to achieve their education goals, we’re rooting for you to achieve your retirement goals.