Share Article

A CPA breaks down a tax-smart way he saves for his children’s education expenses

My favorite college savings tax planning opportunity is a 529 plan. As a father, saving for all my four kids’ college costs is one of my dreams. Unless I want it to be a pipe dream, I believe that I need to set goals to help accomplish this dream. Everyone knows that when you set a goal it is important for you to track your progress. When I have financial goals, I like to have a separate or dedicated account or asset that I can track as I work towards my goal.

As a tax planner, I especially appreciate when the tax code gives me a tax-advantaged vehicle to serve as this dedicated account. Just as an Individual Retirement Account (IRA) provides tax benefits for retirement savings, 529 plans can be a tax-smart way to save for a child’s education.

The Basics of 529 Plans

529 plans are a tax-advantaged way to save and invest for future educational expenses for your family. Contributions do not get invested on a pre-tax basis like an IRA, but there are other tax aspects that are specific to educational goals that 529 plans are uniquely designed to address. 529 plans are not the right tool for everyone. However, over the years I have shared the advantages of 529 plans with many clients and I personally have funded 529 plans to meet my family’s educational goals.

Accountants are not usually known as very creative types, and so the 529 plan simply takes its name from Section 529 of the Internal Revenue Code. The section authorizes each state to offer 529 plans as a way for taxpayers to save for future education expenses. Each state’s plan may be slightly different, but they have many of the same characteristics.

There are three main actors for each account under a plan.

  1. The grantor, who makes contributions to the account. Often the gran