College Is Getting More Expensive — 529 Plans Can Help

Parents everywhere seem to always agree on at least one thing: It goes so fast. Now, that might be hard to realize when you’re in the thick of it with diaper changes and sleepless nights, but before you know it, that infant you brought home from the hospital is walking into their kindergarten class, getting on the elementary school bus, powering through middle school, and getting their driver’s license.

It’s never too early to start planning for your children’s college experience — and your future self will thank you for the contributions you make today. The power of compound interest is significant; it allows savings to grow gradually over time.  

By contributing regularly, even small amounts, you could increase your savings due to the interest earned on both the initial principal and the accumulated interest.

But if you’re just getting started, you might not know the difference between a 529 and other educational savings options.  

That’s where we come in.

Here at GDS Wealth Management, we’ve helped over 400 families plan for their future and have been serving people for the past 20 years.  

Below, we’re going to give you a primer for all things college savings so you can feel more comfortable about securing your children’s future. We’ll give you straight-talk advice, so you know how to get started. Or, if you’ve already started, how to make sure you’re still on track.

Ready? Let’s dive in together.

The Importance of Starting Early: Benefits of Compound Interest  

When it comes to saving for your child's education, starting early can be highly advantageous. The power of compound interest is significant; it allows savings to grow gradually over time. Starting early also provides the opportunity to explore various savings plans and investment options. Whether beginning with modest contributions or larger amounts, consistency can lead to a solid financial foundation for your child's educational future.  

In 1996, Congress created Section 529 plans. They are named after section 529 of the Internal Revenue Code, with “qualified tuition program” being the legal name. This legislation was originally part of the Small Business Job Protection Act and was not initially focused on educational savings. In the 90s and early 2000s, the law on 529 plans was modified a number of times, and today 529 plans are known as one of the top ways to save for college.  

Understanding 529 Plans: Tax-Deferred Growth and Tax-Free Withdrawals  

529 plans offer tax-deferred growth on contributions, meaning your money can grow without being taxed until withdrawn. Additionally, when funds are used for qualified educational expenses, withdrawals are generally tax-free. Qualified expenses typically include tuition, books, and certain K-12 costs, highlighting the versatility of 529 plans. With no income restrictions and substantial annual contribution limits, they offer a flexible approach to saving. Many states also provide tax benefits for 529 plan contributions, making these plans an accessible option for growing educational funds.  

Exploring State-Specific Tax Benefits for 529 Plans  

State-specific tax benefits for 529 plans are definitely worth exploring. Most states offer tax deductions or credits for contributions to a 529 plan, which could reduce taxable income and make saving more manageable. Researching the specific benefits available in your state can help optimize savings efforts. States provide varying benefits, from tax credits to deductions, and understanding them, knowing which apply to you based on where you live, can help you make informed decisions and maximize educational savings.  

Comparing Educational Savings Options: ESAs, Custodial Accounts, and More  

While 529 plans are among the most popular choices, other educational savings options exist. Education Savings Accounts (ESAs) or Coverdell accounts allow additional investment possibilities and do not limit tax-free withdrawals for K-12 education. However, ESAs may have lower contribution limits and income restrictions that families need to consider.  

Custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) offer flexibility to use funds for purposes beyond education. In these instances, the minor owns the account(s) and they are reported under the minor’s social security number (SSN). There are no limits on how much can be contributed to these accounts, but if gifts are over $19,000 per year ($38,000 for a married couple filing jointly), a federal gift tax will be incurred. When the minor becomes an adult, they have full use of the funds for any purpose. UTMA and UGMA accounts come with fewer tax advantages compared to 529 plans and ESAs. Assessing the benefits and limitations of each option can help identify what best aligns with your financial goals.  

Maximizing Savings with Scholarships and Grants  

In addition to saving for college, exploring scholarships and grants can be beneficial. These forms of financial aid may reduce the overall cost of education, thus reducing the amount needed in savings. Scholarships can be merit-based, need-based, or awarded for specific talents and achievements.  

Researching scholarship opportunities early could help identify options that suit your child's qualifications. Many universities also provide grants based on financial need, which may lessen reliance on student loans when combined with savings efforts.  

Find a Financial Partner You Can Trust

Planning for your child's education can involve complexities, but support from professionals is available. At GDS Wealth Management, we’re a fee-only fiduciary committed to putting your best interests first. Our experienced advisers work closely with families to offer personalized guidance based on their unique financial goals.  

GDS advisers take the time to listen to your future plans, take note of what matters to you, and, most importantly, help you with a detailed approach to achieve those goals. GDS can assist in navigating options such as 529 plans, ESAs, and other savings strategies with the goal of helping optimize contributions. Creating a personalized plan may incorporate factors like timeframe, budget, and risk tolerance, while working toward creating a diversified portfolio aligned with your objectives.  

Time continues to fly by—your child may already be off to college, or perhaps your grandchildren visit often. Regardless of where you are in life, take the time to explore these potentially beneficial savings options. Make the most of the future for you and your loved ones.

This National College Savings Plan Day, consider taking steps toward securing your children’s or grandchildren's educational future. Contacting GDS Wealth Management for a complimentary consultation may be a helpful first step in building a financial plan that supports your family's aspirations moving forward.

If you have any questions about way to save for your children's education, contact one of our skilled financial planners today. Call (469) 212-8072 or visit www.gdswealth.com. We are here to help!