The benefits of a 529 plan for college savings explained

HUNTSVILLE, Ala. (WAFF) - When it comes to saving for college it is best to start early. It is also important to use an account that will grow over time.

Financial expert, Jay McGowan with The Welch Group explains more about a smart savings plan that gets a passing grade.

In short, McGowan says a 529 plan, “is a state sponsored investment account that you can make contributions into.” The key is how you end up using that money.

“If you use those dollars for qualified education expenses in the future, you will not pay any taxes on those earnings,” McGowan said. “So it can be a very big benefit to accrue a lot of assets towards funding that education for your kids or grand kids.”

The wealth management expert stresses it is important to get a head start on saving for college. You will end up with more in your piggy bank.

However, the 529 plan does have its limitations. “The key to think about is those dollars do have to be used for qualified education expenses,” McGowan said.

In the past, 529 funds were limited to higher education expenses like college tuition, room and board and books. McGowan talks about a recent change, giving 529 account holders more flexibility.

“In the recent past, they have expanded that to where you can actually get up to $10,000 per year, per beneficiary, you can actually use towards paying for K-12 tuition expenses,” McGowan said.

The financial expert mentions another important change.

“Even more recently than that, they have extended it to student loans. So you can use $10,000 per beneficiary, per lifetime to offset student loan debt as well,” McGowan said. “In the state of Alabama, another thing to consider is that the money you put into the 529 if you’re an Alabama tax filer, you actually get a state of Alabama tax deduction of $5,000 per filer. So, $10,000, married filing jointly.”

Then there’s the good news when it comes to the unused funds from 529 accounts. If one child ends up not going to college and you do not use the funds, McGowan explains, “you can always change the beneficiary to your other children or other beneficiaries. There’s also no time limit on how soon you have to use 529 assets, so you could simply leave the account open, invested for future generations, like a grandchild.”

For more ways to stay financially savvy, visit The Welch Group’s website.

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