Dragging your feet on saving for your kid's college? Or worse, haven't even started?
As you probably know, college can cost a small fortune. So if you want to help the kids pay those big bills it's time to stop procrastinating and starting funding a 529 savings plan.
These education savings accounts can offer parents huge tax advantages and lots of flexibility. Yet many seem to be confused about how these plans work.
Here are some common misconceptions:
"I don't need a 529 because I'm already saving in a brokerage account."
It's good to diversify how you're saving for college. The biggest benefit of a 529 account boils down to these two words: tax free.
"The greatest thing about the 529 is the money grows tax free and comes out tax free. That's the greatest thing since sliced bread and a home run for clients," said Reed Finney, a financial planner with Bleakley Financial Group in Fairfield, New Jersey.
Unlike a traditional brokerage account, you'll pay no taxes on any dividends or interest you earn. Plus, when you start making withdrawals you'll pay no tax on the capital gains as long as the money is being used for qualifying educational expenses, he said.
Also in some states you'll get an additional tax break on your income taxes if you use your state's plan.
"I can't get my money out of a 529 plan if I need it."
If you run into an emergency and need the money for something other than paying for school, you can access it at any time. But that decision will take a bite out of the amount you've saved since you'll pay ordinary income tax on the gains as well as a 10 percent penalty.
"If I don't use it, I'll lose it."
The truth is 529 plans actually offer a great deal of flexibility. If your kid doesn't go to college or gets a scholarship, you can switch the account to another beneficiary.
"Anybody in the family can use it, including the parents," said Finney. "You could even defer it to your grandchildren if you wanted, too."
"If I use my state's 529 plan, my child can only go to a state school."
You can generally invest in any state's 529 plan and use the money for almost any private or public college, university, graduate school, vocational school or trade school anywhere in the country — not just the state you live in. Even some international schools qualify.