The tax-advantaged options for paying for education are vast… and a bit confusing. A great place to start is understanding one of the most popular, the 529 college savings plan.

529 college savings plans

With a 529 plan, anyone can open a college savings plan for any current or future student as long as they are a U.S. resident, have a valid tax ID, and are 18 or over. The deposits are made using after-tax dollars. As long as the funds are for qualified educational expenses, there is no tax on the earnings on the investments in the account. The account is specifically for a beneficiary (including yourself), but the account holder controls the funds on their behalf.

Some states offer an annual deposit. Therefore, an individual can contribute up to the annual gift tax limit, currently $19,000 or $38,000 for a couple. The 529 plans are sponsored by individual states, but you are not required to open an account in your state of residence. You may wish to, however, as some states give you a tax break on your deposits.

Additionally, you can now use the funds to pay for kindergarten through 12th-grade education and college costs. Qualified expenses also include college tuition, fees, books, supplies, room & board, computers, and internet access.

How to take advantage

• Open it early. The sooner you start, the more money is available for education.
• Anyone can open the account. The beneficiary is the student, but the account holder can be almost anyone. Typically, this is a parent or grandparent, but it can also be an account for a nephew, niece, or family friend.
• Review multiple states’ plans. They are not all equal. Some states’ 529 plans provide better investment options and have better-managed returns than others.
• Roll over unused funds. If your youngster does not need the funds, you can transfer unused funds without tax implications as long as it is to a member of the family. This is pretty broad as it includes brothers/sisters, nephews/nieces, parents, cousins, in-laws, and even the account holder.
• Take full advantage of the benefit. You can now use the funds for more than college expenses. Up to $10,000 per year can be used for K-12 tuition, and $10,000 (lifetime limit) can be used for student loan repayments. Even registered apprenticeships qualify.
• No age limit. And unlike other programs, there is no age limit to contributions. States often impose limits on the aggregate value in accounts, so you need to be aware of them. But understand that at some point, other savings vehicles are often better tax instruments. This includes Roth accounts and other IRAs. There are no limits on the use of funds for qualified educational expenses.
• Funding multiple years. There is even a provision to fund multiple years of gifts (super gifting up to 5 years) in a single year. If you want to consider this option, it’s best to ask for help, as it will require some tax reporting.