Between now and the end of the year, we’re still taking your questions on things you can do to help meet your 2015 financial goals. Reid Hinaga, Bank of Hawaii’s Banking Center Manager of the Main Banking Center downtown, to help answer a question about saving for your child’s college expenses.
Rose asks, “My son will be going to college next year, is it too late to for me to invest in a 529 plan?”
A 529 plan, also known as a “qualified tuition program,” is a plan operated by a state or educational institution. It has tax advantages and other potential incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild. There are two plan types: prepaid tuition plans and savings plans. States can offer both types, while qualified educational institutions offer only a prepaid tuition plan. Each plan is somewhat unique, so be sure to compare different plans.
What are the advantages of a typical 529 plan?
For this type of plan, earnings are not subject to federal tax and generally not subject to state tax when used for qualified education expenses for the designated beneficiary. Expenses can include tuition, fees, books, room and board, even purchases of computer technology, related equipment and Internet access. Anyone can set up a 529 plan and name anyone as the beneficiary—for example, a friend, relative, even yourself. There are no income restrictions on either the contributor or the beneficiary. There are also no limits to the number of plans you can set up.
You can set up a 529 anytime. However, one of the primary benefits of a 529 comes from the potential compounding of interest and growth on the contributions you’ve made into the plan. Generally, the longer you have to contribute, and the longer your money remains invested, the more potential gains you may have to use towards paying for college related expenses. So the earlier you start, the better. It will also depend on the expenses you’d like the plan to cover and how soon those expenses will be incurred. Overall, it’s always a good idea to consult with a tax professional or financial advisor before establishing a 529 plan to ensure it makes sense for your particular situation.
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