Saving for College: Why You Need a 529 Plan

Is college on the horizon for your kids? If so, you’ll probably face some extreme sticker shock when confronted with the bills.

The average cost of a four-year private college was $35,260 for the 2017-2018 school year, according to the College Board. But on the priciest end of the spectrum, you could pay up to $60,000 per year.

You should obviously be saving, but simply socking money away can be counterproductive. “Historically, tuition costs have increased five percent each year,” says Jeffrey J. Febbo, CFP, president of his Easton-based wealth management firm. “If you put money into an ordinary savings account that pays one percent every year, you’ll lose ground.”

Fortunately, there’s a way to accumulate a substantial amount of money for education expenses and get a break on taxes: a 529 Plan. This is a special college savings account in which you deposit money that’s then invested into a portfolio, which can grow your money significantly over time.

The best part: “As long as you use the money in a 529 Plan for educational purposes, the withdrawals are federal tax-free,” says Febbo. If you use the money for anything else, the withdrawn funds will be taxed and you’ll have to pay a 10% penalty.

In the past, the money in a 529 Plan could only be used for college. Now you can use up to $19,000 per year to pay for private elementary and high schools. You can also apply the funds to public schools outside of your tax district. If there’s still money remaining in the account after your first child graduates, that balance can be assigned to another child.

Of course, many factors come into play when saving for college, and Febbo urges parents to always discuss their particular situation with a qualified financial professional.