College savings month: Three features of a 529 plan

September is designated College Savings Month, a reminder about the importance of saving for a child’s education. If you’re already saving, review how you’re doing. If you haven’t started, it’s a reminder of the features of saving in a 529 college savings plan. Here are three important features to learn about 529 plans.

Save early, save often

Think of this simple acronym, SESO. It stands for save early, save often. The earlier you start to save, the greater the potential benefits. You have the potential of compound growth — growth on growth — when you contribute to a 529 plan when a child is young. Contributions can add up over time. For instance, by the time a child reaches age 18, a $50 monthly contribution could grow to more than $19,000.¹  While it may not seem like a lot, it’s better than a loan for that amount. If you can contribute $500 a month for 18 years, it could grow to more than $191,000.¹  To ensure you save regularly, consider setting up automatic contributions.

Take advantage of tax benefits

Contributing to a 529 plan may help you reduce state income taxes. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for contributions to a 529 plan. (Contributions are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the plan account owner can claim a tax benefit. See your state tax benefits.

Any earnings in a 529 college savings plan grow tax-free, which gives more of the money the opportunity to grow. Withdrawals are federal and state tax-free as long as the money is used for qualified education expenses, such as tuition, room, board, books, and supplies for post-high school education. Up to $10,000 per year can be withdrawn tax-free to pay for tuition for grades K-12 for public, private, and religious schools.²

Understand 529 plans and financial aid

Many think that saving in a 529 plan will impact financial aid. In fact, a 529 plan has a minimal impact on financial aid. The federal aid formula assesses parental assets at a maximum rate of 5.64%. That means that, in general, for every $1,000 in a 529, the "expected family contribution" toward college costs could increase by only $56 at most.

Learn more about saving for college. If you need help or have questions, contact your financial professional. See how to open a CollegeBound 529 Plan.