A 529 plan is a savings plan designed to help pay for education. Here are some 529 plan basics:
- Contributions can be tax deductible on state income tax returns, depending on your state
- Contributions are not deductible on federal income tax returns
- There are no income limits for contributors to a 529 plan
- No annual contribution limits (within aggregate limit of $239 – $539k, depending on state)
- Can be established regardless of beneficiaries age
- Distributions are tax-free if used for qualified educational expenses
- Investments grow tax-free
- Limited Investment choices
To save for my son’s college education, I used a Coverdell ESA. You can read about that, here. For his middle school and now high school tuition, I have used a 529 plan. While 529 plans were originally designed to help save for college costs, the Tax Cuts and Jobs Act (2017) allows for 529 plan funds to be used for up to $10,000 in tuition annually at elementary or secondary private or parochial schools.
In Arizona, where I live, contributions into a 529 plan are deductible from state income taxes annually up to $2,000 for a single filer and $4,000 for married couples filing jointly. Depending on your tax bracket, that could save you $51.80 – $90 or $103.60 – $180, respectively. That’s not a lot, but why not save that money every year even if all you do is deposit the money into the 529 plan and then take it right back out the next month to pay tuition?
In my case, I try to keep a small safety stock of cash in the 529 plan for tuition. The funds are held in a savings account that pays .64 APY. That’s de minimis, but I’ll take it. More important to me is the fact that the funds are completely liquid. Accordingly, I primarily use the 529 plan as a conduit for earning the state tax deduction every year and paying tuition.
The administrator I use charges no enrollment, contribution, distribution, investment or maintenance fees. You can check out the administrator, here: College Savings Bank.
With Love, P. Gustav Mueller, author of The Present