With the cost of college tuition continually increasing at a rate greater than inflation, most parents could use some help saving for children's future college expenses. If your employer offers a 529 college savings plan, be sure to take advantage of this savings opportunity.
What is a 529 plan?
A 529 college savings plan is a tax-advantaged plan that allows you to save money for college expenses. With a 529 plan, you set aside money in investment accounts. Later, you withdraw amounts without paying taxes on the fund's growth as long as you use the money for qualified education expenses at an eligible educational institution. Some states also offer state college savings plans and may provide deductions from state income tax. Check with your state to compare plans before investing.
Employer-sponsored 529 plans
If you're lucky enough to work for a company that provides a 529 savings plan, don't miss out! There are a number of advantages to participating in a company-sponsored 529 plan:
Convenience—just like with your 401(k) savings, it couldn't be simpler to invest in a 529 plan since your employer deducts money right from your paycheck. Unlike many of your 401(k) contributions, your 529 contributions will be after taxes, but the convenience of payroll deduction means you have no excuse for not saving.
Tax savings—while the money you contribute to your 529 plan is already taxed, you'll be investing your funds in accounts that (hopefully!) will grow over the years. As long as you spend that money on qualified college expenses when you withdraw the funds, you will not pay federal tax on growth of your money. Also, some states that normally charge a state income tax waive taxes on 529 plan withdrawals; check your own state's guidelines for details.
Possible matching funds—as with employee 401(k) accounts, some employers match employees' 529 plan contributions, up to a certain limit. If your employer provides a match, that's free money you could collect and accumulate! Note: while the federal government does not tax growth on employee contributions to a 529 account, employer-matching contributions are subject to taxes.
Savings on fees—since your employer sets up the 529 plan and chooses a single plan administrator for all employees, you're likely to save on administration fees you would pay on your own if you set up an individual 529 plan.
Flexibility—as with any 529 college savings plan, when you contribute to an employer's 529 plan, you're able to set aside money for any beneficiary you desire, including yourself. You can change and add beneficiaries at any time, directing the plan administrator in how to divide your contributions if you have multiple accounts.
Complete ownership—regardless of what happens with your employer or your job, your 529 account is yours to keep.
Especially with high-ticket items like college education, you can never have too much help saving. Make sure you take advantage of all the tax and other savings available in your employer's 529 plan when considering how to pay for college!
To see how much you should expect to pay for your child's college education, use our calculator.