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If you're saving up for your child's future, it might be worth considering a 529 savings account.
“A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs,” says Jordan Janes, partner at Moneta Group, an independent wealth management firm. “Anybody can open an account for a beneficiary—generally a parent for their child. As an account owner, you’ll pick investments, assign a beneficiary—you’ll need their social security number to open the account—and determine how the money is used. A beneficiary is the future student or the person you open the account for. The sooner you open the account, the better (for tax-deferred growth), although every family’s personal financial situation is different, so it’s really a case-by-case basis.”
Here's a look at some of the pros and cons:
Pros
- Tax savings. Earnings grow tax-deferred, and qualified withdrawals (directly to schools) are tax-free.
- Easy to set up
- Anyone is eligible to open an account; 529 plans have no income or age limits.
- Can switch beneficiaries if need be (for example, if you have multiple kids)
- Some states offer tax benefits.
- The donor always stays in control of the account.
Cons
- Could possibly affect your financial aid eligibility
- Investment options are fairly limited (vs. a traditional investment account).
- Your 529 account must be used to pay for qualified higher-education expenses at any eligible education institutions: postsecondary trade and vocational schools, two- and four-year colleges, or postgraduate programs (although the new tax bill now allows you to use money in 529 plans to pay for tuition at K-12 schools, some states are updating their own tax codes).
