A 529 college savings plan is considered one of the best ways for parents to save for their children’s’ higher education. Similar to a 401(k) savings plan or an Individual Retirement Account, contributions to the state-run plan grow tax free. In many states, participants get a tax deduction or credit for their contributions.
Employers — many of whom already offer 401(k) plans — allow employees to make contributions to 529 plans through payroll deduction. And some states, such as Arkansas, Illinois and Nevada, offer employers a tax credit on matched contributions up to $500 per employee. In Nevada and Illinois, for instance, the tax credit is 25 percent.
How it Works
College Board, a nonprofit agency created to expand access to higher education, estimates that a parent contributing just $100 a month beginning when their child is a newborn will have more than $38,000 by the time that child goes to college — enough to cover more than one year at an in-state college.
Contributions made to the plan are invested in mutual funds, exchange-traded funds or similar investments. Interest compounds and the value of the funds will grow or decrease based on the investment’s performance.
Each state sets a limit on how much parents and family members can contribute in total to a 529 plan, but most limits are high. An individual can save as much as $400,000 in some states. And, if a child doesn’t use all or any of the funds, the account can be put in the name of a sibling or another family member.
Families withdraw the funds tax free for qualified higher education expenses, such as tuition, fees, books, computers, and room and board. What qualifies as higher education? The list is extensive and includes undergraduate and graduate school, technical or trade schools, cooking or golf schools and some accredited schools abroad.
Keep in mind that your employees will have to pay taxes on your contribution match as if it was income. For instance, an employee in the 25 percent federal tax bracket would pay $125 in taxes on your $500 employer match. However, you can pay the tax for them.
For more information on 529 plans and other family-friendly benefits, please contact your USI Northeast representative.