529 plans are also called qualified tuition programs. These plans are used as a tax shelter and a way to invest and save money for college expenses in the future.
Why It's Important
Most people don't know this, but there are actually two flavors of 529 plans. The first one is a prepaid educational service plan in which a person purchase credits today for use in the future. This version is also called a state-sponsored prepaid tuition plan. It allows parents, relatives, and friends to purchase tuition at today's prices to hedge against tuition inflation later on. Most people don't know about this type because it is rare. Only certain states are still accepting enrollees (Alaska, Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington). Usually, they only allow you to use the credits at public schools. So, if the child was accepted and wanted to go to a private school, the plan may not allow you to use the funds. In this plan, withdrawals up to $10,000 are tax-free if made for qualified education expenses such as tuition, room, and board.
The second flavor is more popular. Usually, when you hear about 529 plans, it refers to this one, a college savings plan. State governments usually administrate these. There is no limit to the number of withdrawals, and some states actually offer a state tax break if you are a resident and use their plan. If one child doesn't go to college, you can transfer it to another relative (it doesn't have to be your child). As of November 1, 2021, the maximum balance limit for a single beneficiary was increased to $525,000! $525,000 sheltered from taxes as long as it is used for educational expenses.
Also, another fun fact most people don't know is that you can utilize any states' 529 plan regardless of where you live. In my case, North Carolina doesn't have any state benefit to keep it here, so I opened one with Utah. In my opinion, Utah and Virginia have the best fund options, so I highly recommend those. If you are not in North Carolina, check with your state to see if they offer state tax benefits for keeping it with them. If not, feel free to shop around to find a state's plan that you like.
Suppose you aren't comfortable investing; no worries! Most plans have funds that you can invest in based on the child's current age. They will automatically adjust the risk as the child ages so that it could be very hands-off. I opened one for each of my kids in 2019 with about $500 apiece. I haven't made any additions since then, and they are at $823.78 & $683.80, respectively. That's a 14.49% and 10.91% return on my investment so far!
A snapshot of one of my sons' accounts
One more thing. You could also use it for yourself! So, if you have goals of going back to school and getting a degree, start saving for yourself in a college savings plan! The only thing to remember is that, with investing, time is important. Let it have time to age and grow, so start as early as possible!