There is no doubt college is an expensive endeavor. In fact, approximately 70% college students have student loan debt. If possible, one of the best ways to avoid college debt is to save up for it, and there are many ways to do this. One of the best (and maybe commonly overlooked) options is saving within a 529 Plan.
A 529 Plan? That sounds complicated and fancy. Trust me here, it’s not. A 529 Plan is just a place where you put the money you are saving for college. But Caleb, can’t I just put that money in my bank account? Well sure you can, but if you like FREE MONEY I’d put it in the 529 Plan. Yes, I said FREE MONEY.
529 Plans are set up by each state, as a way to encourage folks to save for college. Each state works basically the same. As an example, the state of Missouri has a 529 Plan that I signed up for because we wanted to save money for my wife to go back to college. We signed up online, an easy process, and then started contributing money to the plan at our leisure. $100 one month, $300 the next, etc. The amounts contributed to the Plan were invested in a fund of our choosing. Since I wasn’t feeling risky, we chose to put the money in a conservative interest fund, which earned us a few bucks here and there. Once we started receiving the college tuition bills, we just withdrew money from the Plan to pay the bills. Simple as that!
Okay, Caleb. This is all nice and good, but earlier you said FREE MONEY. Where is the free money? Fine, fine. I’ll get to the free money.
There are actually two ways to get free money:
- 33 of the 50 states offer tax credits/deductions for money contributed to a 529 Plan. These can be HUGE. For example, in Missouri, you can get FREE MONEY of approximately 6% of your total contributions to the Plan for the year. So, if you contributed $4,000 to the Plan for the year, you would receive approximately $240 of free money.
- The earnings that the Plan generates are tax-free for both federal and state taxes! So, for the conservative income fund mentioned above, any proceeds earned from the fund are tax-free. Never taxed by the government. Sounds good to me!
There are a few other nice things about 529 Plans.
- There are no fees to set up the Plan.
- Even if the college isn’t in your state, you can still use the money.
- Anyone can set up a Plan for someone else. Say jolly ole’ grandma wants to help with her grandkids education. She can setup an account in their name, and still reap all the benefits described above. You can even set one up for yourself!
- You can choose what “fund” you want to put the Plan money in. Feeling risky, try a risker option. Just want a few bucks here and there, try a conservative option.
- You can withdraw money from the Plan at anytime. Need the money in 20 years? Sure. Need the money next week? Fine as well.
Alright, now this sounds to good to be true. What’s the catch? Well, there really isn’t one. But there is one thing you need to watch out for. The money contributed to the Plan MUST be used for education expenses OR ELSE (you’ll face a penalty of 10%.) So really, you just need to make sure you don’t put more money into the Plan than you need for college. So just watch it closely. However, education expenses do include tuition, books, supplies, etc. so you can spend the money on any of these things. You can also transfer the money to anyone who has education expenses. So say your kids don’t use all the money, you can always transfer it to your grandkids later on!
All this being said, there are way more intricacies to the Plan than I can discuss here, so please check out your individual state’s Plan for more details. But don’t let these intricacies scare you off. It is really hard to find a downside to these Plans. So, if you or someone you know is saving for college, please please please have them look into a 529 Plan. After all, who doesn’t love FREE MONEY!
As always, I’d love to hear your thoughts, questions, and comments. Shoot me a message on the “Contact Me” page.