Answering Your Questions About Saving Early and Often with a 529 Plan

You’ve likely heard that it’s important to start early when you’re trying to reach a long-term savings goal. But what does that mean for families who are trying to plan for college? We reached out to the experts to get answers to your most common questions about why saving early can pay off later. Andrea Feirstein is the managing director of AKF Consulting, one of the leading sources of insight in the college savings industry. Susan T. Bart is a partner with the law firm of Schiff Hardin LLP. She focuses her practice on trusts.

Q1: What’s the advantage of starting a 529 plan when my child is born?

Our 529 experts broke this down into three key benefits:

Compounding Interest

The biggest advantage is the tax-deferred compounding of a 529 account, which means you earn interest on the original investment as well as the interest earned over time. By making investments early on, it gives the money time to compound and grow. “The power of tax-deferred compounding is that it grows at a more rapid clip than a taxable account,” says Feirstein. “So saving early helps you grow your money exponentially the sooner you begin to save.” 1

Taxable vs Tax-Deferred Investing over an 18-year Timeframe

While 18 years may seem like plenty of time to start saving, the difference between starting when a child is a newborn and even a few years later can be drastic. To accomplish this goal, Bart suggests making automatic contributions through a payroll deduction, so that the funds are clearly dedicated to college savings.2

Monthly Contributions

“If you can get in the habit of making regular contributions, then you have a great method for saving,” Bart says. “With the compounding, the appreciation on those assets and the income will accumulate over time.”

Emphasizing Education

Having a college education can open up a world of possibilities for students. According to the Bureau of Labor Statistics, it can mean hundreds of dollars more per week in income. And studies show, having a 529 account can encourage a child to pursue an education. According to the Center for Social Development, a child is three times more likely to go on to higher education if they know they have a college savings account.3

Average Weekly Earnings

Feirstein says this is crucial, because a 529 account isn’t just a way to save, it’s also a way to show your children you believe in their future. “What you’re saying to your child is, ‘I know you’re going to go to college and I’m going to make that path easier for you,’” Feirstein says. “You’re giving up something today to help your child realize their potential in the future.”

The Gift of Education

Not only can a 529 account show your child you believe in their education, it gives others a chance to invest in your child’s future. “For birthdays, graduations, or other big moments, people can make contributions to the 529 account,” says Bart. “Even if it’s just $20 at a time, those contributions to the college savings account, instead of for movie passes or toys, can add up.”

Bright Start makes this easy with options for online and mail-in contributions through GiftED. Plus, friends and family have the option to send a birthday card or certificate to let their loved one know a present is on the way.

Q2: But what if they don’t go to college?

The reality is, you don’t know if your child may one day go to college. Thankfully, money in a 529 account can be used at a variety of institutions to meet a student’s career goals, including public and private colleges and universities, vocational, trade, technical, professional institutions, and even some foreign schools. If your child decides to pursue a different path, the money in a 529 account can be transferred to another member of the family without any consequences. “That’s the beauty of it,” says Feirstein. “It’s not as if you’re giving up the money for good. You can transfer the account to someone else or even yourself; maybe you want to take classes in retirement.”

Q3: Are there any potential penalties if I do need to take the money out of the account for something other than education?

If your child doesn’t use the money, you don’t have another beneficiary in mind, and you aren’t interested in using the money for your own education, you can still take the money out of the account as a non-qualified withdrawal. However, any deduction previously taken for Illinois income tax purposes is also added back to Illinois taxable income.

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There’s really not a major penalty for using a 529 account because if the account owner ever needs it, they can take it back. If you put money in a trust, there’s no circumstance in which the parent or grandparent can get that money back.
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Additionally, the earnings portion (not the amount you contributed) is subject to federal and state income taxes and a 10 percent federal tax. But don’t let that dissuade you. Both Feirstein and Bart say that potential liability is a drop in the bucket compared to the benefit of a larger savings pool.

“There’s really not a major penalty for using a 529 account because if the account owner ever needs it, they can take it back,” says Bart. “If you put money in a trust, there’s no circumstance in which the parent or grandparent can get that money back.” As Feirstein says, “The benefit of saving greatly outweighs the potential liability if my child doesn’t go to college.”

Q4: If I start early, how much do I need to save?

Start developing your college savings strategies and goals with Bright Start’s cost of college guide.