How to Take Advantage of 529 College Plans 

Caleb Silver, editor and chief at Investopedia, joined Cheddar News to talk about the benefits of a 529 savings plan. Those plans are used to supplement costs associated with education for students in kindergarten through college.&nbsp;

Closing Bell

Time. Now for stretching your dollar where we give you tangible tips to help you make the most of your money. College decision day was last week, both rising tuition and shrinking savings. Getting into college is really just half the battle. Today, we're looking at 5 29 plans, they are essentially savings plans for educational expenses and they can be a big help for everything from tuition to room and board, even books and equipment. So joining me now is Caleb Silver editor in chief at investopedia. Caleb. Thanks for joining. Good to be here as always. All right. Well, let's take a look here. Of course, the cost of tuition jumping more than 7%. And just in this past year as inflation rises across the board, how can someone use a 529 plan to their benefit? It kind of forces the savings and its savings that you can actually grow money in through those investments and then take those gains tax free and apply it to not just college but actually now K through at school, you can apply up to $10,000 for K through 12. Now, according to the government. So you can use this money for education for your kids, your grandkids, a nephew or niece or even step kids. You can use it broadly now, more broadly than ever. Interesting. Of course, there might be different types of these 529 plans. Are there different ones that apply to different people? Yes. There's the prepaid sort of college savings plan. 529 plan where you sort of pay in advance, what you think you're going to spend, put that money away. And then there's the traditional state sponsored 529 plans where you're making contributions, you can make them as often as you want. There is no limit to the annual amount you can contribute, but there is an aggregate amount and again, you can invest that money that you've contributed and you can take those gains again, tax free and apply it to a range of educational expenses. So, what about withdrawing money from this? If you have to do it before, it's actually used for what it's intended to be used for. What should our viewers know? Yes, you get a penalty. You will be penalized on the gains and on the interest on the gains if you have to take the money out and use it for other purposes. But I'm in the period of my life where I'm now using the 529 savings that I put away for my kids to college and I tell you what, it is a great feeling to be able just to put that into the 529 New York 529 plan and direct that money right to the college because I put it away, easy to do. And over time that money has grown, I've been able to strategically invest it through the mutual funds and some of the bond funds offered through the 529 plan. Very wise, we were showing a full screen there. We can just run through obviously, you know, firsthand, I mean, what these, what this money can actually be used for tuition fees, books and equipment. You mentioned a computer if you need it, room and board on or off campus for those upper class men. If you're living off campus, you can apply some of the money there, travel abroad. That's a nice way to use the 529 plan and up to $10,000 in student loan debt relief. So that's pretty important as well. And you know what else is really cool that if you don't spend it all in college, you can use some of the leftover money and put it in a Roth ira for that student when they get out of college. Ok. And I assume no rollover cost, no rollover cost. This is again, tax free money that you have made just by investing for the purposes of education 500 to 9 named after the tax plan, but super popular and actually a great way to discipline yourself as a parent or even a grandparent or an uncle or an aunt to save that money for college. Because guess what, the cost of college rising every year? 7%? Compound annual growth rate? Kristen? I wish we had stocks that were doing that. Yes. So do I any asset? I think that that would be returning 7% would be nice in this environment. Any drawbacks, Kaleb. Yes, there are some and some of that is the fact that you don't have a huge range of things that you can put that money in. So there are some limited choices in terms of those funds. Again, these are run state by state. So the rules differ by state in terms of how much you can contribute on an aggregate level. There are some tax consequences if you use the money for other purposes and if you take the money out early, so there are some consequences that you'll have to pay taxes on that interest. Ok. So best advice better for the parents to manage this or for the student in college to manage this. No, no, no. You want to manage this as parents or his grandparents or uncles or aunties. This is for your child or your step kids or the kids in your life, you manage it for them but show them and this is what we did. Show them what's inside of it, show them how it works. So that when we cut those checks for college, which are getting more expensive every here they know where that money has come from, they know how we've saved it and maybe that helps set them up for when they have kids down the road. How early can you start contributing to one of these plans? You have to have a child in order to make the commitment. I think you have to have a child at least to put it in somebody's name. You could start the savings. But to start that account, you need to put it in that beneficiary, beneficiary's name. That is the name of the child. But again, your grandparents can contribute to it. If they want uncles, aunts friends, they can all do it and you could give money also through a state gift without paying taxes that can go into the 529 plan as well. And it sounds like too, it applies to both private and public institutions. There's no differentiation. Absolutely not. You can use it for grad school as well. Public private state schools, trade schools, culinary schools, use it for any type of education. And as I said, you can now use it now for K through 12 up to $10,000. Impressive. All right, Caleb Silver, our resident expert here. He's the editor in chief at Invested Caleb Thank you. Thank you.