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The Benefits of an Education Savings Fund for Your Child’s Future

Putting money into an education fund

The quality of education that your child receives will likely have a significant impact on his or her future success, which makes it important to have adequate savings for education expenses, especially if private school is involved. One of the most popular and convenient ways of saving for education-related costs is a 529 plan. These plans are essentially education savings funds that invest on behalf of a specific child and earnings generated from the investment grow on a tax-free basis as long as they are used for qualified education expenses.

It’s common for parents to start a 529 plan as soon as their children are born to save for college. However, the good news is that these plans can now also be used to fund primary education costs. While many families choose to move to a higher tax zip code with top-rated public schools, private schools offer a more personalized education experience and roughly 10% of U.S. children receive their primary education from private institutions. The annual cost of private school in the U.S. is expensive, with private elementary schools averaging $9,631 per year and private high schools averaging $14,575 per year.

As a result of the 2018 tax reform bill, the tax-free benefits of 529 plans were expanded beyond secondary education expenses to include primary education costs. Parents or guardians can now make tax-free withdrawals from a child’s 529 plan up to $10,000 per year for primary school tuition expenses. However, unlike 529 withdrawals for secondary education costs that can be used for textbooks, computers, and certain living expenses, tuition is the only thing that can legally be used for primary school costs.

Deciding if a 529 Education Fund is Right for You

Before you pull money from your child’s 529 plan, be sure to check here first to see if you are able to do so in the state where you reside, as withdrawing money if you are not allowed can trigger penalty fees and could potentially even leave you paying additional taxes on that money. In addition, keep in mind that withdrawals from your child’s 529 plan will reduce the overall amount in the investment portfolio and reduce the impact of compounded growth in the account.

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