My parents had one of those frames with two photos, one of my brother and one of me, each of our first day at college. My brother had someone snap his photo on the way to class on his first day in Charlottesville as a first year at the University of Virginia. I stood by a car, grinning giddily, tailgating before my first football game in South Bend at the University of Notre Dame…as a twelve-year-old. It was my mom’s cheeky joke about how committed I was to becoming a Fighting Irish since that day.

I had an amazing college experience. And if you have kids, I know you want that for them, too. Yet, the sticker shock of the cost of higher education can be daunting. So, on 5|29, let’s review the 529 education savings accounts with a few commonly asked questions.

Why is it called “529” and how does it work?

They are dubbed ‘529 plans’ because they are covered by Section 529 of the Internal Revenue Code, allowing for certain potential tax advantages. An account is opened in a single owner’s name and identifies one beneficiary. Money is invested in mutual funds or ETFs with earnings growing tax-deferred – meaning, you do not claim investment income annually. Then, when distributions are made for qualifying education expenses of the named beneficiary (e.g., college tuition for Junior), those distributions are tax-exempt from capital gains, too. Plans are offered by a state, and nearly all states sponsor plans.

So, I have to use my state’s plan?

First, you don’t even have to use a 529 – there’s no requirement. You can save outside of 529 accounts, secure loans, investigate scholarship and grant opportunities, etc. There are many ways you can opt to save for your kids’ education.

If you decide using a 529 is a good choice for you, there are no restrictions related to using your own state’s plan, and it’s important to compare plans to see what’s best for you. Consider whether your state offers any additional tax advantages like a state income tax deduction, the investments offered within the plan, and other costs of the plan.

Does the good ole Commonwealth of Virginia offer that tax deduction?

Not every state offers an income tax deduction – residents of Virginia are eligible for a state income tax deduction for contributions made to one’s own account. Deductions can get tricky, though, so consult your tax advisor for all the specifics.

What if my child attends a school in *gasp* Maryland or any other state?

The choice of state for the 529 plan does not change or dictate anything related to where the beneficiary attends school within the United States. If you have a Virginia 529 plan, and the beneficiary attends school in Maryland (or even South Bend, Indiana!), the funds can still be withdrawn tax-exempt for qualified education expenses.

Are there downsides to using a 529 plan?

While the tax advantages of these plans can be attractive, there are downsides to keep in mind. There are penalties and potential taxes for non qualified withdrawals, and the investment options can be limited. It’s important to speak with your financial advisor about whether or how to use this offering as part of your own planning so you’re aware of all the benefits and potential drawbacks.

Bring any of your 529 questions or any other money matters to the next Wine & Wealth – first Wednesday of the month at Wine Gallery 108.

And go Irish!

This communication is for informational and educational purposes only. No content or reference is intended to be a recommendation for the sale or investment in any product, strategy or service nor should it be perceived as individual advice. Please seek the advice of a financial advisor regarding your particular financial situation.

XML Financial Group and its employees do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Visit xmlfg.com for more information. 

Photos: personal photos of me as a kid at Notre Dame and actual first day at Notre Dame.

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