What Is A 529 Plan? Is It Right For You?
Unfortunately, the IRS doesn't currently have a tax-exempt savings plan to help support pets. That is unless your pooch is a service dog. In that case his/her training and any expenses related to him/her may be tax-deductible but you should consult your CPA/tax attorney to be safe. As much as I want to be the most spoiled member of the family and in some cases I am, I also know that I won't get to go to college unless I'm accompanying my older brother there.
And college is expensive, so what is a family to do? The 529 plan was created in 1996 as a way to help parents afford the growing expense of child education. Parents (or anyone else) can contribute up to $15,000/year or a single contribution of $75,000 but that contribution will count for the next 5 years. Contributions up to a certain amount are sometimes exempt from state taxes but are not exempt from federal taxes. Contributions are not subject to taxes as they grow. As of 2018 this money can now be used for school expenses before college (elementary, middle school, and high school) up to $10,000/yr.
The downsides:
investment options are limited
annual management fees are paid to the state for creating the plan and an advisory firm for managing it
funds can only be used for qualified education expenses which means you could end up paying taxes and penalties if your child gets a scholarship
Determining whether a 529 is a good fit for you will likely boil down to two items:
Do you think you or your manager can outperform the investment offerings within the 529 plan taking into consideration taxes?
Do you think your child will get a scholarship?
For my dad, it makes sense to have a 529 plan, but to also save in a taxable account outside of a 529 plan. He and my mom will contribute to the 529 plan up to the limit where they stop getting Illinois state tax benefits and will use set up a taxable account to compliment the 529 plan.
If you do set up a 529 plan I recommend using a target date fund offered by the plan to manage your investments. Select the target date based on the current age of your beneficiary child.
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