With economic uncertainty ahead, parents are seeking ways to give their children a safer financial future. A 529 account can be funded by parents, family, and friends to be used for a child’s postsecondary education. If you’re wondering whether to open a 529 account, consider the following benefits to you and your child:
You may be able to claim a tax credit
Many states offer an annual tax credit for 529 deposits made. Personally, my state’s tax credit gives me about one hundred dollars each year for my 529 deposits. Getting financially rewarded for funding my teenagers’ futures feels great.
Your child can avoid student loans
Student loans are a financial disaster. Many college graduates find themselves paying these over decades while putting off important financial moves, like adequately saving for retirement. With the benefit of compound interest, the money stashed in a 529 account may allow your child obtain a bachelor’s degree with zero student loans.
Flexibility of use
While it’s common knowledge that 529s can be used for college expenses, these funds can also go towards apprenticeships, technical degrees, and even certain K-12 expenses.
Unused funds can be transferred to a Roth IRA
In 2022, the SECURE 2.0 act made exciting changes to the 529 account, allowing up to $35,000 of unused funds to be transferred to a Roth IRA. The 529 account does need to be open for 15 years before beginning these transfers and may take up to five years to fully move the funds (the current annual Roth IRA contribution maximum is $7,000). That being said, $35,000 is a fantastic start to retirement savings, particularly for a young person who may not have the wisdom or finances to prioritize retirement.
That 35K can turn into a million dollars
Transferring $35,000 into a Roth IRA over five years may grow into one million dollars in retirement savings for your adult child. For instance, if a 25 year old has a 529 account with $35,000 remaining, transferring that balance to a Roth IRA over five years with an 8% average rate of return would grow to just over $1,000,000 once this person is 65.
Final thoughts
The tax advantages, freedom from student loans, flexibility, and potential for hefty retirement savings makes a 529 account a no-brainer for your child. Start saving today to put your child on a path of lifetime financial stability.