The Best 529 College Savings Plan
You may have heard that the cost of college tuition is rising, but did you know that the cost of tuition at a 4-year public-university could be as much as $225,000 for a child born today, under moderate assumptions? Saving for college is a big challenge for many parents, but a 529 College Savings Plan can help. However, not all 529 plans are created equal, and one I know may be better than the rest (spoiler: It is the West Virginia plan).
529 College Savings Plans have many tax and savings benefits, but few people use them.
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Few families actually save in 529 plans. While these plans have been widely publicized for years, families either do not know about them or do not have the money to set aside. According to the U.S. Government Accountability Office, only 3 percent of families contributed to a 529 plan in 2010. This is far lower than one might expect considering the need to save for rising costs. Nearly every state has at least one plan and many have more than one. There are more than 100 plans nationwide, many of which are open to residents from any state (ex. Washington parents can open a 529 account in West Virginia - no travel required).
There are behavioral and tax reasons why one should use a 529 plan, rather than keeping money in a savings or investment account. The behavioral reasons are that once the money is deposited in the plan, there are tax penalties for retrieving it, which keeps parents from doing so on a rainy day. While the penalty is relatively small (10 percent of the investment income), the deterrent works. In addition, the tax benefits to using a 529 plan are helpful to families. The investment gain on assets deposited into the plan is tax deferred and the withdrawals are exempt from federal income tax (like a Roth IRA) if used for qualified education expenses (ex. tuition and books). While contributions to a 529 plan are not deductible from the donor’s federal income tax (like the Roth), many states provide state income tax deductions for all or part of the contributions of the donor. This matters most to those in high tax states.