Consider a 529 plan when saving up for your child’s college fund
Saving for college is a struggle for many families. Currently, only 36 percent of middle-income families and 29 percent of low-income families are putting money away for their child’s college fund, according to a study by Sallie Mae.
But as tuition costs continue to climb, planning well in advance can help relieve the financial burden of post-secondary education. Whether you have young children or a child nearing college age, now is the time to get started. While it may seem the easiest way to start is to set up a standard savings account, it’s not the most ideal. You could end up paying thousands in avoidable taxes. A better option for college savings is through a 529 plan.
What is a 529 Plan and how can it benefit you?
In 1996, the federal government created 529 savings plans, which are tax-advantaged plans designed to encourage saving for future college costs. For contributions to these plans, you won’t have to pay a federal tax. And some states, including Wisconsin, also exclude contributions from state tax.
These have become the most popular education-specific savings plans because of their tax-free benefits and higher interest rates. To get started with a 529 plan, you can open an account for as little as $25 per month, and you can control the amounts and frequency of automatic deductions or lump-sum payments. Also, as Wisconsin residents, you can deduct up to $3,100 per contributor for each beneficiary. The only requirement is that the money be used by the beneficiary you name to pay for qualifying education expenses.
Wisconsin has two 529 plan options, Edvest and Tomorrow's Scholar, both of which offer an easy and flexible way for families to prepare for these costs. Edvest is available on a direct-sold basis, while Tomorrow’s Scholar is sold through financial advisors and fee-only planners. Talk to an expert to find out which one is the best fit for you.
Changes to 529 plans that could affect you
In 2014, Wisconsin’s legislature modified the state's 529 college savings plans. Some of the changes that parents should be aware of include:
- Contributions in excess of $3,100 may be carried forward for an unlimited number of years.
- Any contributor who is a Wisconsin taxpayer may contribute to any Wisconsin 529 plan account and receive an income tax deduction for their contributions, regardless of their relationship to the beneficiary.
- The maximum annual deductible limit will be increased annually to reflect inflation.
- The deadline for making the annual deductible contribution will be extended to April 15th of the following year.
- Deductions taken for contributions and later withdrawn as a non-qualified distribution will be subject to recapture.
- Wisconsin 529 accounts will not be subject to claims by creditors.
Other financial obligations often take priority when saving for college. But do the best you can because every little bit helps. The more you save ahead of time for higher education, the less your child will need to borrow in the future.