- Last year, I opened a 529 college savings plan and named myself as the beneficiary.
- The money grows tax-free, and I can use it for qualified education expenses.
- If I don’t use the money for my education, I can change the beneficiary to another family member.
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Ever since I graduated from college, I’ve looked for ways to boost my knowledge and skills. Whether it was one-off marketing courses or pursuing the Certified Financial Planner designation, I’ve always known learning more would be a priority.
With less spending on travel, restaurants, and shopping, I could earmark some money for future education expenses … so I opened a 529 college savings plan in my name. Usually, these state-specific, tax-advantaged savings plans are used by parents saving for their kids’ education, but I’m single and I don’t have kids. I might not be the target market, but here’s how I plan to use the account.
How I picked my 529 plan
While there are plenty of 529 college savings plan rankings, some high-rated plans wouldn’t work for my situation. Specifically, I needed to plan for a short-term timeline and keep costs low.
I started my research by comparing fees, investment options, and the initial deposit. Depending on where you live, you should also consider state-level tax breaks. My state, Tennessee, doesn’t have an income tax, so I wouldn’t get a state tax benefit from using our state’s 529 plan.
Ultimately I picked the Vanguard 529 for the low fees, flexibility, and investment options, but there is a downside: a steep initial deposit of $3,000.
The benefits of my 529 plan
There are several reasons to use a 529 college savings plan over a brokerage account for investing, especially when it comes to taxes. Here are some of the benefits I considered:
- No income limits or age restrictions. I can open and fund an account regardless of how much money I make. Also, there are no age limits, so I can spend the money on education later in life.
- Anyone can make contributions. I could accept family members’ contributions for my birthday or holiday gifts. There are no limits on contributions, as long as I stay under the plan’s lifetime limit.
- Tax-free growth. I can invest the balance without paying taxes on those earnings if I spend the money on education expenses. For example, if I open my 529 with $3,000 and contribute $50 more per month, I could have $6,977.94 in five years, assuming 4% annual returns (compounded monthly). After five years, I would have added $6,000, earned $977.94, and those earnings wouldn’t be taxable income for education expenses.
- Tax-free withdrawals for education expenses. To avoid paying taxes or penalties on my 529 account earnings, I’ll need to spend the money on qualified higher education expenses like college tuition, fees, room and board, necessary books, supplies, or equipment — even internet access.
- Pay for student loans. I could also use my 529 money to pay for graduate school after earning my degree. While I don’t currently have student loans, I could spend up to $10,000 of my 529 balance on student loan principal and interest.
The downsides of my 529 plan
While earning another degree is my long-term goal, plans could change, making my 529 plan a potentially risky move. If I use the money for something other than qualified education expenses, I will owe income tax plus a 10% penalty on my earnings.
Luckily, there is a better option: changing the 529 account beneficiary to another family member. According to the IRS, I can switch the beneficiary to a future child, my sister’s child, or other relatives. These beneficiaries could use the money for college — or up to $10,000 on K-12 education, vocational school, or apprenticeship costs — so there are plenty of ways to use the money, regardless of my education plans.
But for now, I’ll contribute what I…