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Is It Too Late to Start a 529 Plan? Thumbnail

Is It Too Late to Start a 529 Plan?

Higher education can be an excellent path to a well-paying job and financial security in life. Unfortunately, the price has risen to reflect that, with the cost of attending a 4-year college increasing 64% over the last 20 years. 

To plan for these costs, many families have the option to open 529 accounts for their children. In fact, 529 accounts can be opened before the future student is even born. If your college-bound student is in high school, you might be wondering: is it too late to start a 529 plan? 

What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan designed to help pay for higher education. These plans were originally limited to funding postsecondary education but were expanded to cover K–12 education in 2017 and apprenticeship programs in 2019. They can also be used to pay off student loans and, starting in 2024, you’ll be able to roll over 529 funds into a Roth IRA

Because an Education Savings Plan provides returns based on compound interest, the more time you can spend contributing to the plan, the more benefit it will yield. If a person opens a 529 plan when their child is born & contributes $300 to it every month, at a 3% interest rate it will be worth over $85,000 when that kid is headed off to college.

Education Savings Plans are the most popular type of 529 plans. These are investment accounts you contribute after-tax money to   which grows tax-free and can be withdrawn tax-free so long as the funds are used for a qualified education expense (tuition, room and board, books, technology, equipment, fees, etc.). Many states also offer tax incentives as well. The Ohio deduction is $4,000 per year, per beneficiary, with unlimited carry forward.

 Every state but Wyoming offers a 529 plan, and most states allow you to invest in their plan even if you don’t live there and your student won’t be attending school there. Each state typically offers several plans, meaning you have several options to choose from to best match your financial situation. Our HCM Advisors are happy to help you find the best option for you and your student.

Should I Open a 529 Plan Now?

If you’re saving money for education, it almost certainly makes sense to use a 529 plan. 

Even if you only have a few years, a 529 plan is still a good option to consider. The 529 plans are able to realize comparable returns to traditional investment accounts with the bonus of tax-free growth and federal income tax-free withdrawals for qualified education expenses. Additionally, in all but four states, you can contribute to a 529 plan to capture the tax deduction and immediately use the money to pay for tuition, effectively providing a discount on education spending

Final Answer

Education is an excellent way to improve oneself and increase future earning potential, but it has become rather expensive to acquire. Fortunately, with savings plans like 529 accounts, you can avoid some of the costs and employ another tool in your comprehensive tax and financial plan for you and your future student. Therefore, even if you have less than 4 years to save, a 529 plan still makes sense. 


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