A 529 College Savings Plan is a savings account dedicated to college or other educational funds by the IRS with a federally approved tax break. The average age-based portfolio begins with about 83 percent in stocks when the child is born, gradually reducing the stock allocation to about 67 percent at age 7 and 14.7 percent at age 18. You can save the money for graduate school or switch the beneficiary to another family member, such as a younger child, or a spouse who’d like to go back to school. But not all college-related bills are valid for 529 funds. You can use funds from a 529 account for a wide range of education-related expenses. Minimums vary, but some plans can be opened without any initial contribution, and continuing contributions can be as low as $10 per month, according to the College Savings Plans Network, which offers a comparison tool. Do employers offer help with college savings? When 529 plan funds are used to pay for qualified education expenses there is usually nothing to report on your federal income tax return. Starting just one year earlier can make a significant difference, according to a model that Morningstar based on average allocations for stocks and bonds in age-based portfolios. The average published cost of tuition, housing and meals is about $22,000 a year for in-state students at public four-year colleges, and about $50,000 for private, nonprofit four-year colleges, according to the College Board. (The totals don’t include fees and expenses like books and equipment.). Some companies offer 529 perks as rewards. Withdrawing funds from a 529 isn’t as straightforward as it sounds. Alliance Data in Columbus, Ohio, added Gift of College gift cards this year to a menu of rewards that employees can choose from when redeeming points earned in a workplace recognition program, said Deanna Allison, the company’s financial benefits manager. While any time is a good time to save for college, now is a smart time to put money into a college 529 savings plan that has underlying investments in the stock market. The company reviewed plans holding about 97 percent of 529 account assets. Form 1099-Q and Form 1098-T will list the amount of the 529 plan distribution and how much was used to pay for college tuition and fees, but it is up to the 529 plan account owner to calculate the taxable portion. * Amount assumes an actual investment return of 6% with monthly contribution on the first day of each month. If you do that, you’ll owe interest on the earnings only, plus you’ll pay a 10 percent penalty. As with any investment, gains are not guaranteed. Paying for college isn’t easy. With a start at age 6, the median balance would be almost $4,000 higher. The most popular investment options for 529 plans automatically shift funds from stocks to bonds as the child ages. That includes tuition, fees, books, supplies, and computers. Many families wait too long to open accounts and lose out on a chance to let their money grow more, Morningstar reported. No presidential candidate in modern history has refused to concede. There are limits to the amount you can borrow via federal loans each year: $5,500 in your student’s first year, $6,500 in the second year, and $7,500 after that if you claim your student as a dependent. If you’re not careful, you could get hit with a 10 percent penalty, plus you’ll have to pay interest on the earnings for any funds that you use for the wrong kinds of expenses. This hypothetical is for illustrative purposes only. Parents who wait until their child is 7 to start saving, he said, will have to save much more out of their own pocket to reach their goal. Part of the reason may be that people are simply unfamiliar with 529 plans, Ms. Hume said. Each year that they wait lowers the growth potential of their savings, as the portfolios shift to less risky investment mixes. In fact, he said, parents can open an account even before a child is born, naming themselves as a beneficiary and then changing the beneficiary to the child’s name after birth. More employers are starting to include college savings help as one of their benefits, but it’s not widespread. More from Consumer Reports:Top pick tires for 2016Best used cars for $25,000 and less7 best mattresses for couples. One-third of Americans don’t even know that a 529 plan is a way to save for college, according to a May 2019 survey by financial services firm Edward Jones. On average, 529 accounts are opened for children who are just over 7 years old, the investment research company Morningstar found in its annual analysis of the state-sponsored plans. On average, 529 accounts are opened for children who are just over 7 years old, the investment research company Morningstar found in its annual analysis of the state-sponsored plans. The impact can be significant, however, if a grandparent owns the account — but there are several workarounds, said Mark Kantrowitz, publisher of Savingforcollege.com. Keep in mind that you have to spend the money you take out of a 529 account in the same calendar year (not school year) as the withdrawal and that you should keep your receipts. Eleven percent of employers offered payroll deductions for 529 plans, according to 2019 survey by the Society for Human Resource Management. Assuming a $50,000 investment, divided into equal monthly installments, someone who began saving when the child was 7 could expect a median balance of almost $81,000 by the time the child turned 18. Research conducted for the College Savings Plans Network, a group that promotes the accounts, found that even though they had been around for more than 20 years, only about a third of Americans had heard of them. Thanks to a change under the 2017 Tax Cuts and Jobs Act, 529 money can now also be spent on expenses for K-12 education—but only up to $10,000 per student each year. Gift of College, a website that lets friends and families contribute online to 529 accounts, offers 529 gift cards at stores as well as through employers. The American Opportunity Tax Credit gives you a $2,500 tax credit when you spend $4,000 on qualified college costs. Copyright © 2020 Multiply Media, LLC. Consumer Reports financial expert Donna Rosato shows “Consumer 101” TV show host Jack Rico tips on how to maximize aid when paying for higher education. When did organ music become associated with baseball? Additionally, keep in mind that eligibility for the tax credit begins to phase out for single parents with incomes above $80,000. While there is no federal tax deduction for 529 contributions, many states offer a deduction on state income-tax returns. It could be about $30,000 higher if the account had been opened at birth. Some age-based portfolios have more aggressive tracks than others, however, so savers should make sure to check their plan’s details to be sure they are comfortable with the mix of investments as their child approaches college. There’s no credit if the couple’s income is $180,000 or more. “The IRS doesn’t allow double dipping,” says financial aid expert Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com. No. That leaves only about a decade for families to save and for the earnings to compound, said Madeline Hume, lead research analyst for 529s at Morningstar. Expenses such as transportation and insurance, for example, are not covered. The amount of money from a 529 college savings plan investment is dependent upon what? It doesn’t always make sense to use all your 529 money at once if you think you will also have to borrow money to pay for school. And some offer a state tax deduction even if you open the account in another state. The money can also go toward expenses for room and board, as long as the student is enrolled in school at least half-time. Saving has become more essential as the cost of college has increased and the burden of student debt has become more of a concern. the performance of the market in which its invested. If you spend your 529 money in the first years of college and need to borrow later, you could exceed federal loan limits and have to turn to costlier, less consumer-friendly private loans, says Fred Amrein, a fee-only financial planner in Wynnewood, Pa., and author of “Financial Aid and Beyond: Secrets to College Affordability.”. If you have children heading to college this fall and plan to tap 529 funds to pay expenses, it’s important to withdraw the money correctly. You can also cash out of the account entirely. Consumer Reports has no financial relationship with advertisers on this site. 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