Military Finances 101: 529 vs. Other Educational Savings ProgramsCollege Planning
It's May and graduations are in full swing. If your child is graduating from High School, you're probably thinking about paying for college. If you child was just born, hopefully your thinking about saving and paying for college. Many Active and Retired Senior Military Officers and NCOs, have the GI Bill available. That may take care of college education for one kiddo. What if you have more than one child or less than the full GI Bill. Enter education savings programs.
What education savings programs are right for you? A 529 plan is one of the most common educational investment options, but there are other choices. Let’s explore the different programs to help you determine which one is right for you.
A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. These educational expenses could include a variety of things, including tuition for college or K–12 education, apprenticeship programs, or student loan repayments.1
The main benefit of a 529 plan is that the contributions grow tax free, and if the money is used for eligible educational expenses, the withdrawals are also tax free. In addition to this, over 30 states also offer a tax deduction or credit for 529 plans. For example, in New York, contributions to a New York 529 plan of up to $5,000 per year by an individual and up to $10,000 per year by a married couple filing jointly are deductible when computing New York taxable income.2
Another benefit of 529 plans is that they don’t have any annual contribution limits (although depending on where you live, they may have a lifetime contribution limit). This means you can save as much as you want for your family’s education. However, you may have to pay a gift tax if you contribute too much.3,4
Finally, the beneficiary for a 529 plan is transferable, which means that if your intended beneficiary doesn’t end up using the funds for education, you can transfer the account to another beneficiary in your family. This could include a spouse, in-laws, children, nieces, or nephews, first cousins, aunts, uncles, or in-laws.5
Educational Savings Account (ESA)
An education savings account, or ESA, is another educational savings program available to people who want to help contribute to their child’s education costs. There are a few main differences between an ESA and a 529 plan.
The first difference, and benefit, of using an ESA is that you have more flexibility in how your contributions are invested. You can choose almost any investment (stocks, bonds, mutual funds, etc.). In comparison, in a 529 plan, the assets are invested in mutual funds, ETFs, and other similar investments, and you don’t get a say in how they are invested. This means that when it comes to asset allocation, you have more control and flexibility with an ESA.
But while you might have more control over your investments, you also have less flexibility regarding contributions and withdrawals. One primary consideration is that you can only invest $2,000 per year per child in an ESA. In addition to this contribution limit, there are income level restrictions. You can only use an ESA if you make less than $110,000 as an individual or $220,000 as a married couple filing jointly.6,7
Finally, there are more restrictions when it comes to the beneficiary. A 529 plan has no restrictions on the beneficiary’s age. With an ESA, you can only open accounts for beneficiaries who are under 18 and can only make contributions until they’re 18. Also, all funds need to be withdrawn before the beneficiary turns 30.6
Similar to a 529 plan, your contributions grow tax free and can only be used for educational expenses. One difference is that ESAs include other K–12 expenses outside tuition, while 529 plans do not.
Contributing to your loved one’s education is beneficial for them and can be a smart strategy for saving on taxes for you. Whether you invest in a 529 plan, an ESA, or another option, saving for the future is always a good idea.
Military Finances are Different
While the tax code treats military members and civilians the same when it comes to education savings plans, that isn't always the case. There are a lot of places where the tax code treats active and retired military members differently. You also have financial benefits not available to your civilian counterparts. That's why we think you should work with a financial advisor/planner that deals with your unique military and veteran financial situations daily. If you'd like to find out how we work with Active and Retired Senior Military Officers and NCOs, use the button below to schedule a free initial consultation.
If you found this article useful, you might like the following blog posts:
Military Finances 201: Getting Ready to Use US Savings Bonds to Pay for College? It Might Not Work Like You Think
Military Finances 201: 529 Plan "Leftovers"
Military Finances 201: Do GI Bill Benefits Affect Financial Aid and the FAFSA?
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.