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Three Things You Should Know About 529 Plans

By Natalie Hayes Schmook, MBA, CFP, CVA

If you are an optometric professional who has children, chances are you’ve heard of 529 plans as a savings plan for college tuition. 529 Plans are great vehicles to save with all kinds of bells and whistles:

  • Growth (capital gains, interest and dividends) in portfolios are tax-deferred and tax free if used for qualified tuition expenses
  • The plan owner controls the funds (mom or dad stay in control of the money, not the child)
  • You can change the beneficiary to another child or a generation up or down if the primary beneficiary doesn’t need the funds
  • Many states offer a state income tax deduction for 529 plan contributions

There are also a few catches with 529 plans that are important to know before opening one.

  1. You need to use your state-sponsored plan to take advantage of a state income tax deduction. I regularly see 529 plans at custodians such as Fidelity, Charles Schwab or Northwest Mutual. Most parents are surprised to hear that they aren’t able to take advantage of their state’s income tax deduction because they aren’t using the state plan. Make sure you look up your state’s rules before choosing what custodian you’ll use for your child’s plan.
  2. Many 529 plans can be used for primary school education. Have a child in private school? Many states now allow 529 plans to be used for private school education. This means you can take a state income tax deduction on some or all of you contribution and use it in the same year to pay tuition. This is especially helpful for households in high-income situations who are using other means to save for college (such as a Roth IRA).
  3. The funds really need to be used for education. Occasionally I’ll see plans that are overfunded, which can create some unintended consequences. Funds not used for education are subject to taxes on the accumulated gains and income as well as a 10% penalty on any gains (the only exception to this is if the beneficiary gets a full scholarship). Because it can be hard to know what’s in your child’s educational future, I generally suggest targeting to funding in-state public school tuition through a 529 plan and setting aside additional savings elsewhere that can be redirected to other purposes.

Disclaimer: This material is for educational and informational purposes only to the best of the author’s knowledge and is not to be construed as personalized financial or investment advice. Consult a financial professional about your personal situation.

Email your questions for Money Talk to mbijlefeld@jobson.com.

Natalie Hayes Schmook, MBA, Certified Financial Planner™, Certified Valuation Analyst™, is the founder and owner of Hayes Wealth Advisors, a financial planning and investment management service for practice owners and their families.

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