The theme this week on the One Minute Retirement Tip podcast is: grandparent-owned 529 college savings plans. 

Today, I’m talking about the basics of 529 plans so you understand the benefits of these plans and why you may want to contribute them as a way to save for college. 

College is expensive, and if you pay attention to the news there are a constant stream of stories about mounting student loan debt, defaults, and the ever-increasing cost of college that make it much harder for young adults entering the workforce after college to buy a house and save for retirement, because they’re saddled with lots of debt. 

To avoid burdening their children and grandchildren with student loans that can take years and even decades to pay off, many parents and grandparents want to help pay for college. Enter the 529 college savings plan. 

A 529 plan is a type of account where the money inside is earmarked for college expenses - this can be tuition, room and board, and other college costs. The types of educational expenses that 529 plans can be used for are actually quite broad, but the important thing to remember is that the money is meant to be used for education expenses. If it’s used for something else, you’ll get taxed and penalized. 

With that in mind, here are the 2 most important basics you should know about a 529 college savings plan. 

• High contribution limits. You can contribute up to $15,000 into a 529 plan in 2021 per beneficiary, and twice that if you’re married. That means that if you’re married and you have 3 grandchildren, you can save up to $90,000 this year for your grandkids college - $30,000 for each grandchild. 

You can actually contribute more than this by making a lump-sum contribution to the 529 plan - it’s known as superfunding a 529 plan, but you’ll want to do your homework so you don’t make any tax blunders or miss opportunities to max out your 529 contributions. 

High contribution limits are great for estate planning purposes, gifting to your grandchildren in a tax-efficient way, and making up for lost time if you’re starting a 529 plan in the middle school or high school years. 

 

• Tax-free growth. Another important characteristic of 529 plans is that once the money is inside the 529 plan, the money can grow tax free, and as long as the funds in the 529 are used for qualified education expenses, there is no tax when you take the money out. The sooner you establish and fund the 529 in the child’s life, the more time is on your side to have the money grow tax-free, and the less you’ll have to contribute to the plan in the long-run.

 

Those are the 2 most important features to know about the 529 plan. There are several other important features to know about 529 plans - like anyone can contribute to these plans, and they’re highly flexible - so even if the beneficiary doesn’t go to college you can still use the funds for something else or someone else in the future. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance