The prospect of saving money for a child’s future college education can be so overwhelming that parents often do nothing – and then regret that decision when college is about to begin. That’s why it’s smart to start a college savings plan now.
If you’re looking for a plan that offers tax advantages and investment options, consider a 529 College Savings Plan. Wondering what that is? Read on for answers to your questions.
What is a 529 plan?
A 529 plan is a state-sponsored, tax-advantaged college savings plan. Most states have their own 529 plan, and you can typically invest in any state’s plan. The Nebraska plan is called NEST, or Nebraska Educational Savings Trust.
You can use 529 college savings plan funds to pay qualified expenses at accredited public or private colleges. Your child doesn’t have to go to college in the state where you have your 529 account. If you invest in Nebraska’s plan, you can use these dollars at virtually all universities, community colleges, technical schools, and graduate schools nationwide and some abroad.
What does “tax-advantaged” mean?
The money you invest in a 529 plan is tax-deferred (meaning you don’t have to pay taxes on the earnings as long as the funds are withdrawn for a qualified expense), so you can grow your savings significantly over time! And qualified withdrawals are not taxed when you use the funds for college-related expenses (like tuition, room and board, books, supplies, fees). Plus, Nebraska offers up to a $10,000 state income tax deduction for contributions account owners make to their NEST account.
Why should I consider opening a 529 account?
A 2017 IHEP study shows that children with college savings between $1 and $499 are three times as likely to attend college and four times as likely to graduate as those without any college savings. Contributing small portions over time can really add up. And once your money goes into a 529 college savings account, you may be less likely to take it out for other expenses, since you will be financially penalized for using it on non-college related expenses.
How do I open an account? What’s the minimum amount I can put in each month?
If you wish to invest in Nebraska’s NEST plan, here’s a link to their enrollment page. The NEST plan does not have a minimum contribution amount – you can invest what you feel you can afford. You can always increase your contributions as you are able. Keep in mind that friends and family can give gift contributions to help your account grow.
I’m inexperienced at investing. How will I know which 529 investment options to use?
Depending on your investment confidence and/or expertise, you can get a 529 Plan in one of two ways: advisor-sold or direct.
- An advisor-sold 529 plan is managed by a financial advisor, and the fees will vary depending on the class of shares and investment option selected. This person’s job is to know the market and help you with your college savings goals.
- Direct 529 plans are managed by you. You will be in charge of watching market trends, and making investment choices. The benefit to a direct 529 plan is lower fees because you are not paying for an advisor’s advice.
Currently, the Nebraska NEST program has four 529 Plan options. Research more about each plan on the NEST website.
What happens if my child ends up not going to college?
If your child doesn’t go to college or gets a scholarship that covers much of the expenses, you can withdraw the money you invested, but you will generally pay income tax and a penalty on the earnings portion of a non-qualified withdrawal. The penalty is waived if:
- The beneficiary receives a tax-free scholarship
- The beneficiary attends a U.S. Military Academy
- The beneficiary dies or becomes disabled
However, your earnings will be subject to federal, and sometimes state, income tax.
If you want to avoid paying taxes and a penalty on your earnings, you have a few options, including:
- Change the beneficiary to another qualifying family member
- Hold the funds in the account in case the beneficiary wants to attend college later
- Make yourself the beneficiary and further your own education