How to Make the Most of Your 529 Plan
The Sooner the Better
Because 529 plans offer tax-free compounding, the earlier you start the account, the more time the funds have to grow. The longer you wait the more you’re going to have to contribute to meet your goal.
Set It and Forget It
Most plans allow you to link a checking or savings account to your 529 plan to take advantage of automatic contributions. Set up regular monthly contributions to stay on top of your savings goal.
Pay Attention to Fees
529 plans usually include enrollment fees as well as administrative fees upon withdrawal of funds. Though money for qualified expenses can be withdrawn tax-free, “qualified” is the word to pay attention to. Be sure to do your research on your individual plan to know what constitutes a qualified expense in order to avoid fees. Likewise, withdrawing funds too soon and withdrawing more than the allotted amount for the year will prompt fees.
Take Advantage of State Income Tax Benefits
Some states offer residents a tax deduction or credit for 529 plan contributions. Typically, you need to use your home state’s plan to qualify, but a handful of states offer a benefit for contributions made to any 529 plan. Annual tax savings can be reinvested and will compound over time.
Make It a Family Affair
Next time a relative asks for gift ideas for your child, consider asking them to contribute to your 529 plan. As a bonus for them, contributors are eligible to take a deduction as long as it’s offered by that state.
Stay Involved in the Status of the Account
Because a 529 plan is an investment account, it’s important to keep tabs on it, periodically checking in and keeping up with trends and industry news that could affect your plan (there are websites and newsletters for which you can sign up devoted specifically to college savings plans). Additionally, when your family budget changes, so should your 529 contributions. If you get a raise or bonus at work, inherit some money, get an income tax refund, or experience other windfalls, be sure to allocate some of those funds into your 529 account.
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