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Introducing 529 Plans

2 MIN READ09 FEB 2023

Compound can now help you save for your children’s education with 529 plans.

A 529 plan is a tax-advantaged way to save and invest money for future educational expenses.

Although the specific tax advantages of a 529 plan can vary by state, the basic structure is consistent. Any individual can open a 529 savings account and contribute cash (with some state-specific contribution limits). The cash in the account can then be invested according to the individual’s preferences. The value of the account compounds over time, and when it’s time to withdraw cash for educational spending, money can be withdrawn tax-free.

Educational expenses such as private school tuition, college tuition, books, and certain room and board expenses, are tax-free at the federal level and in most states. This makes a 529 plan an attractive tool to get the most out of your education-related savings.

Here’s an example of how a 529 plan could be used to fund educational expenses:

  1. You work with your financial and tax advisor to understand any tax benefits your state offers for 529 plans and set up an account in the name of your child.
  2. You contribute $15,000 to the plan each year for 3 years. (If you live in a state that offers a tax deduction for 529 contributions, you can deduct the contribution from state taxable income.)
  3. The $45,000 in contributions grows as it is invested in the market. If you choose to change how the assets are invested, you don’t incur any taxes (as in a retirement account). So the contribution grows tax-free.
  4. When your child is ready for college, you withdraw $55,000 to pay for tuition, fees, and books. You pay no federal tax on the withdrawal because it’s for qualified expenses. (Depending on the state, you may not pay state tax on the withdrawal, either.)

As a Compound client, we can help you set up and manage your 529 plan. We’ll help you understand your state-specific policies, open your account, plan donations, determine the tax implications of your donations, and map out how 529 plan withdrawals and contributions fit into your broader financial plan.

And because Compound is helping manage your plan, your financial and tax advisor are in the loop on your savings and spending plans.

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