Acing your 529 College Savings Account
Although avoiding mistakes regarding your 529 plan is desirable, it may be of comfort to know that you cannot make a catastrophic mistake when it comes to these accounts. With the state eager to remain competitive, fees are driven lower and lower, while there will also always be the option to roll this plan over into a different 529 plan. With that said, here are some tips to avoid common mistakes the first time around with your 529 college savings account.
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Contributing the wrong amount. The first potential mistake can arise when choosing how much to contribute to the account. Both issues of either contributing too much or too little can have repercussions of their own. College expenses are consistently on the rise, and the average American family cannot afford their child’s college degree outright. Due to this unfortunate reality, states have made sure to have a low minimum contribution payment for these accounts. However, if you are keeping college savings in a taxable savings account, opposed to the 529 plan account, you are certainly contributing too little to your 529 plan. On the flip side, contributing too much to your 529 plan can result in a 10% penalty tax when you withdraw this money. This can be viewed as a good problem, as you are still reaping the benefits of the liquid and tax advantaged 529 savings account; however, some may wish to avoid this these particular
taxes altogether.
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Ignoring the fine print. Another common mistake is assuming that the money put into your 529 plan will be available for any expense related to college. Of the many costs that go into your beneficiary going off to college, not all of them are qualified expenses; for example, off-campus student living, transportation, or student loans. It is important to be informed of all restrictions and qualifications before deciding how much to contribute to your 529 college savings plan, and how much to leave out for the non-qualified expenses.
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Ignoring the gift tax exclusion. Many people also simply don’t know they can take advantage of gift tax exclusion by participating in a 529 college savings plan. According to federal law, 529 plans are considered gifts, and allows many contributors to avoid estate taxes. You can contribute up to $14,000 a year to your beneficiary’s 529 plan without incurring any federal state tax.
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Using this account as an emergency fund. Withdrawing money from your 529 saving account will result in a 10% penalty on top of being taxed on the earnings. Needless to say, it will also make saving a sizable amount for your beneficiary
more difficult.
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Waiting to save. Another unfortunate mistake made by many families is starting a college savings account too late. You can start a 529 savings account before your child is even born, giving this type of account the potential to grow into a sizable nest egg for your child or other beneficiary to use for their education. It is never too early to start planning and saving for something that will be so valuable in the future. In the case that your child is born a star athlete and receives a full scholarship (which is notably rare), these accounts can be used for different beneficiaries or can even be used for yourself, thus, leaving no excuses to put off college savings for your loved ones!
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