529 plans help offset the cost of college tuition with tax-advantaged savings. However, only about 30% of Americans know that 529 plans are effective tools for saving for college. Many of those who do know about them fail to take full advantage of what they can offer due to some common mistakes and misconceptions.
The money you invest into a 529 plan will appreciate tax-free; you can make withdrawals for college-related expenses tax-free as well. However, if you want to take full advantage of everything a 529 plan can offer, you should know the following common mistakes and avoid them.
Mistake #1: Investing for Tax Breaks Instead of Plan Benefits
Yes, the tax incentives offered by many 529 plans can be enticing. Additionally, some states will even provide state-level tax breaks for investing in 529 plans. However, this should not be your main focus when looking for a 529 plan for your child. Instead of looking at tax incentives, base your decision instead on the plan’s range of fund choices, overall performance, and low cost. If you live in a state that does not have income tax, this can make your decision-making process even easier since you won’t be distracted by potential tax breaks.
Mistake #2: Listing the 529 Plan Under Another Family Member’s Name
When you create a 529 plan for your child’s college savings, be sure to list it under your name as the child’s custodial parent. Attempting to arrange a 529 plan under another relative’s name or under the name of a noncustodial parent offers little advantage and will potentially impact your child’s ability to qualify for financial aid. Financial aid lenders will assess your 529 plan differently depending on who the main account holder is. For example, if it’s under a noncustodial parent’s name or a grandparent’s name, any withdrawals you make for college-related expenses will count as untaxed income and reduce the student’s financial aid eligibility.
Mistake #3: Hoarding to Pay for Grad School
It may be tempting for some to hold off on withdrawing some money in a 529 plan to help pay for graduate school, but this isn’t the best idea. It’s better to aim for your child graduating from undergraduate school with little to no debt; students who complete their undergraduate educations without debt are more than twice as likely to continue to graduate school. Carrying debt will compel many to seek employment as soon as possible. Instead of holding back, pay as much as you can toward your child’s undergraduate education. If there is anything leftover you can use it for your own continuing education or another child’s future college expenses.
Mistake #4: Stopping Contributions During College Years
Just because your child has started college classes doesn’t mean you should stop making contributions to your 529 plan. If your 529 plan doesn’t have enough in it to fully pay for your child’s tuition and you have already exhausted other potential investments, it’s probably best to continue contributing to your 529 plan through your child’s college years to take full advantage of the financial benefits these plans provide.
A 529 plan, when managed effectively, can be a fantastic financial resource that not only helps pay for college but also provides tax-related benefits depending on where you live. Take your time when shopping for a 529 plan and choose one that offers flexible performance for the best results.