Should I Start a 529 College Savings Plan?
by Frank Bolinsky
The average cost of college in the U.S. in 2024, including living expenses, textbooks, and other necessary items, is just shy of $40k a year. This average has more than doubled this century, and it can be intimidating to think about what the cost will be when our children are ready to go to college. One tool to help combat the rising costs of higher education is a Maryland 529 Plan. A 529 Plan is named after Section 529 of the IRS code. It is a tax-sheltered investment account that can be used for educational expenses. 529 Plans in Maryland are managed by T. Rowe Price and you can invest as little as $25 a month. What is the benefit? When people invest money, they will typically have to pay taxes on any gains. With the 529 Plan, the underlying investments can grow annually without any tax consequences. Furthermore, if the money is used for qualified educational expenses after it’s withdrawn then you never pay federal or state taxes on that growth. There are a lot of different investment options as well depending on your appetite for risk. Family members can also contribute very easily, which makes for a great gift option and a useful tool for grandparents who want to start distributing wealth while they are alive.
What can you spend it on? The money can be used to pay tuition for most colleges and universities, as well as some trade schools and apprenticeships. It can also be used to pay for materials and room and board. Recently, the plan was expanded to include tuition for K-12, but that is capped at $10k a year. What happens if we don’t use it? Plans and balances can be transferred to a relative of the child. You can also use the money for graduate studies. Recently, they added a benefit allowing you to roll a $35k lifetime unused balance into an IRA retirement account for the child. How do I open one? A lot of really good information can be found here and you can open an account by going here. Only one parent or grandparent can be the account holder with the child as the beneficiary, but multiple people can open a 529 Plan for a single child.
Source: maryland529.com/home/529-basics.html
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