June 14, 2024


BIRMINGHAM, Ala. (WBRC) – As college tuition continues to climb, families are increasingly turning to 529 plans to save for education costs. These tax-advantaged accounts offer a practical way to invest in a child’s future without the burden of heavy taxes on growth and withdrawals.

“A 529 plan is a tax advantage account for you to save money for education costs,” explained Beth Moody, Senior Financial Advisor at The Welch Group. “You can put money in, the money grows tax-deferred, and if you take the money out for qualified education expenses such as tuition, room, and board, the money comes out tax-free.”

Parents and guardians are encouraged to open a 529 account as soon as possible after their child is born.

“College is getting more and more expensive, and the earlier you start saving, the more you can maximize savings,” Moody advised. “Even if you can’t fund a big amount, starting with a small amount, $25 or $50 a month, gets you in the habit of funding it. It’s still better than nothing.”

The tax benefits of a 529 plan make it particularly appealing. “It’s really important to get the tax deferral right now,” Moody emphasized. “It allows more of your dollars to grow for that education need. If you pay the taxes now, you have less to grow over time. But if you put the money in, all the earnings, interest, and dividends compound within that tax-free vehicle, as long as the money comes out for qualified education expenses.”

Investment options within a 529 plan can be tailored to individual risk tolerances.

“You get to choose your own investments,” said Moody. “If you’re more risk-averse, you can invest conservatively. If you’re okay with more risk, you can include more stocks. There are options to customize your mix or choose target-date funds.”

Alabama residents receive additional benefits from the state’s 529 plan. “If you fund an Alabama 529 plan, you get a state tax deduction for up to $5,000 if you file single and $10,000 if you file married filing jointly,” Moody noted. The state’s plan, accessible through www.collegecounts529.com, offers both direct and advisor-assisted enrollment options.

The flexibility of 529 plans extends to their use and transferability. Qualified expenses include tuition, fees, books, supplies, and even room and board. Additionally, funds can be used for K-12 private schooling and to pay off student loans up to a lifetime limit of $10,000. If the funds aren’t used, they can be transferred to another family member or used by the account owner for their own qualified expenses.

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