There’s a reason these plans are catching on: They offer many tax benefits that are better than using a simple savings account.
Not only can you get a tax deduction or credit for contributions (more than 30 states and the District of Columbia offer a direct state tax deduction for your contributions), earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books and room and board.
However, that does come with some degree of risk.
Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then become more conservative as college nears.
Yes, stocks have been on the tear. In fact, the U.S. market is on its longest bull run in history. Still, a downturn — or even a correction — can come at any time. And your college-age child shouldn’t have to pay the price.
Pay attention to your fund’s approach toward shifting from stocks to bonds. Full exposure to the stock market may be just fine if you’re opening an account for a newborn, but it’s probably a bad idea if your child is two years away from college.
An overly aggressive portfolio could quickly put your child at a financial disadvantage without enough time to recoup losses before move-in day, according to Brian Merrill, a certified financial planner and partner at Tanglewood Total Wealth Management.