The 529 plan offers a way to provide financial assistance to a loved one for some or all of their higher education expenses. But what many people are not aware of is that a 529 college savings plan could enhance your retirement, as well.
How the 529 Plan Works
A 529 savings plan is a tax-advantaged account that is designed for helping to pay for education expenses. These can include “traditional” schooling, as well as the cost of apprenticeship programs.
There are actually two different types of 529 options – savings plans and prepaid tuition plans. The 529 savings plans grow on a tax-deferred basis. Withdrawals are tax-free, provided that the money is used for qualified education expenses.
Prepaid tuition plans allow the 529 account owner to make contributions in advance for tuition at certain colleges and universities. In this case, today’s tuition cost may be “locked in” for future education.
Why 529 Plans Aren’t Just for College Savings Needs
While 529 plans can provide a great way to help a child, grandchild, or other loved one with paying for their schooling, these financial vehicles are sometimes referred to as “bonus” retirement savings plans, too.
One reason for this is because several benefits of the 529 plan can work in your favor as an investor when it comes to your longer-term retirement savings needs. For instance, unlike the IRA (Individual Retirement Account), the 401(k) plan, and the Health Savings Account (HSA), there are no limits on the amount of contribution that may be put into a 529 plan.
Therefore, if you have “maxed out” the annual contribution to your personal IRA and/or your employer-sponsored saving plan, then a 529 plan can provide you with an additional avenue to add funds that will grow on a tax-advantaged basis.
In addition, you may be able to obtain an income tax deduction on your state taxes (depending on where you reside) for your contributions to a 529 plan. And of course, if funds are accessed for education-related expenses, you can make these withdrawals tax-free.
Is a 529 Plan a Good Fit for Your Retirement Savings Objectives?
Even though there are a number of nice benefits that you could gain by adding a 529 plan to your retirement savings strategy, these plans may not be right for everyone. There could also be some other possible alternatives that you might want to consider.
For instance, annuities also allow for tax-deferred growth of the funds inside of the account. Likewise, there is no annual maximum contribution on annuities (unless they are held in a qualified retirement plan). Therefore, these financial vehicles allow for another potential way to continue funding tax-advantaged savings plans, even if IRAs and 401(k) are fully funded for a given year.
As an added bonus, fixed and fixed indexed annuities can provide you with a known, reliable, and ongoing income stream. So, regardless of what happens in the stock market – or even in the economy overall – you can count on income from an annuity. This, in turn, can reduce the concern that you may have about paying your living expenses in retirement, as well as outliving your incoming cash flow.
If you would like more details on how to put together a viable retirement income plan that is based on your specific needs, time frame, and risk tolerance, you can chat with an Annuity Gator specialist by calling (888) 440-2468
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Use a 529 Plan as a Bonus Retirement Account. By Aaron Levitt. March 18, 2022. MutualFunds.com