If you follow me on Twitter or Instagram you might have noticed a surge in activity on Wednesday. I was invited to join a group of bloggers at P. Allen Smith’s Garden Home in central Arkansas for a tour of the grounds and the home (more on that soon) and a lunch hosted by #AR529.
We learned all about what a 529 plan is, how it works and the benefits of using such a plan to save for someone’s education (whether that’s your child, a grandchild, family friend, or even yourself).
How a 529 Works
529 is simply the part of the tax code that talks about this sort of college savings plan. I’ve been describing it as sort of like a retirement account, in that you put in money that is then invested in different funds and can make or lose money over time.
You can choose how aggressive you want to be in your investments, or they have an age-based program that automatically adjusts into less-aggressive funds as your child gets closer to college.
You can also invest as much or as little as you want. To set up a 529 in Arkansas, you need just $25 to open the account. You can make contributions through direct deposit from your paycheck (as little as $5 a pay period), or you can transfer money or send in a check whenever you want, in whatever amount you want.
The advantage of this sort of program is that you can claim contributions on your state taxes for a tax deduction (up to $5,000 in contributions for a single person or $10,000 a year for a couple filing jointly). You can contribute up to $14,000 for an individual or $28,000 for a couple before hitting the federal gift tax threshold.
And as long as the money is used for educational expenses — that includes tuition, room and board, books, etc. — you don’t have to pay income tax on it when it’s withdrawn.
Where Can a 529 Be Used?
529 funds can be used for virtually any kind of educational expense, at two-year and four-year colleges, technical schools, graduate school and so on. As long as the school is accredited by the U.S. Department of Education, you’re good to go.
What If My Kid Gets a Scholarship?
If you don’t need your fund for tuition you can use it for other educational expenses. If you still have more than you need, you can transfer the benefit to another sibling or family member, or even to yourself.
You can also withdraw the money for any reason, but it is subject to tax at that point, plus a 10 percent penalty.
What if We Move?
Every state has a 529 plan, so you can roll your savings over into your new state’s plan or keep the money you have in the Arkansas plan and open a new one in your new state if there are tax benefits to doing so.
What Else is in it for Me?
If you meet income eligibility requirements, the state will actually match your savings either 1-to-1 or 2-to-1 up to $500 and for up to five years. You have to enroll in the Aspiring Scholars Matching Grant program only during the months of January through April, but you need to have an account before you apply, so you could set it up now to apply for next year. (The 2-to-1 grants are for people making less than $30,000, while 1-to-1 matching is available for people with income up to $60,000.)
Never Too Early
One of the speakers at the event was Gwen Moritz, who is the editor of Arkansas Business and who started saving for her sons’ education soon after the first son was born when they lived in Tennessee.
He’s now out of college completely debt free thanks to the 529 savings plan, and his brother is in college right now. They’ve stopped contributing to the plan because they think they have enough money to see their second son through to debt-free graduation as well.
“You can’t save too much and you can’t save too early,” she said, noting that an easy way to start setting money aside is by taking the money you had used for a particular expense (diapers, say) and saving it instead of spending it on something else.
Need More Information?
I’m by no means an expert on 529s or financial planning, so if you have further questions please contact the 529 administrators in your state or talk to your financial planner.