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Education Funding with 529s: Better with a Plan

Although saving for retirement one of the biggest goals individuals will save for throughout a lifetime, funding a child's education comes in at a close, expensive second. Steadily increasing tuition costs mean that parents need to start thinking about college funding sooner rather than later, including where those funds will be held and how they will be invested. One of the most common education savings tools is a state's 529 plan which provides a number of benefits to parents starting to save for college now.

Each state sponsors its own 529 plan with varying rules under the purview of different investment companies, but the IRS has set some general guidelines and tax benefits for those utilizing this type of plan to save toward future education. First, a 529 plan allows parents to set aside funds for college in a tax-deferred and potentially tax-free account, with some states also providing a tax deduction for contributions each year, up to a certain limit. Funds that are contributed to a 529 plan grow without tax assessed on the gains each year, and when used for qualified education costs, can be withdrawn without any tax liability to either the child or the parent. This allows for continual compounding within the 529 account which leads to potentially higher returns over time.

In addition to up-front and long-term tax benefits, 529 plans offer a great deal of flexibility as it relates to contribution amounts and sources as well as investment options. Most importantly, the IRS has set contribution limits for 529 plans that are in-line with annual gift tax limits of which parents should be aware. For the current tax year, contributions to a 529 from any source cannot exceed $14,000 per child, although there are a few exceptions that allow lump sum contributions in one year. Contributions, while limited in amount per beneficiary, are not restricted to parents alone. Grandparents, aunts, uncles, and family friends can all make contributions as long as the total limit is not bypassed in any year. Finally, most state 529 plans offer a plethora of investment options to account holders based on time frame and overall risk tolerance.

Although 529 plans offer a number of benefits to parents planning for a child's future education costs, this savings vehicle can get complicated quickly. As such, it is beneficial to work with a seasoned financial professional who is well-versed in both state-specific and general 529 guidelines so that you are able to navigate through each of your options with ease. Additionally, a financial planner will be able to provide deeper insight into the most appropriate balance between saving for college and other mid- to long-term financial objectives based on your total cash-flow needs, and can assist in determining what contribution amount and frequency works best for your specific circumstances. Finally, a financial professional will be able to provide invaluable knowledge on investment options within the 529 plan selected, and can help monitor performance over time.

Utilizing the expertise of a financial professional can help increase the chances of long-term success in achieving your educational funding goals.


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