One of the easiest, smartest, most beneficial ways for parents and other family members to save for a loved one’s future education is a tax-advantaged 529 education savings plan. If you’ve never heard of this savings option — or only have a vague idea of what it is — read on. 

What is a 529 Plan, and How is it Different from Other Options?

A 529 plan is a tax-advantaged investment vehicle designed to help families save for future education needs. These plans are designed to be flexible and to make investing accessible for all families. Named for Section 529 of the federal tax code, these savings plans were created by Congress as a way for families to earmark savings for a wide range of academic needs. The Education Plan is the name of New Mexico’s direct-sold 529 plan. 

Tax Advantages

Many people wonder why they shouldn’t just save for their kid’s future education with a standard savings account. The short answer tax benefits. 

When used for qualified education expenses, earnings from a 529 account are not subject to federal or state taxes. That means you’ll pay no taxes on your account as it grows over the years. And many states offer additional tax advantages as well. In New Mexico, for example, contributions to a 529 plan with The Education Plan® are state income tax deductible, offering another benefit to saving with a 529 plan. 

The compounding growth of contributions made year after year can really add up especially if you start saving for your child’s education early. Your account’s earnings will automatically be reinvested, resulting in even more potential savings for your child’s future education. 

Setting up a 529 savings account with The Education Plan is easy, often taking less than 15 minutes. There is no minimum contribution requirement, and you can use the “set it and forget it” approach to make automatic monthly or biweekly contributions from your checking or savings account, which can be increased over time.

There is no annual contribution limit to 529 plans and contributions of up to $18,000 per donor per beneficiary qualify for an annual gift tax exclusion. However, there is a maximum aggregate 529 plan contribution limit for the total contributions to the 529 plan in a specific state for a single beneficiary over the life of the account. This lifetime maximum ranges from $235,000-$575,000 and varies by state.

Straightforward Investment Options 

Using a 529 plan to save for future education may make more sense than using a traditional savings account because of the tax benefits, But, for some, choosing investments feels daunting. One of the key benefits of a 529 account with The Education Plan is the straight-forward investment options, including simpler options, which are designed with the flexibility to meet a variety of investment needs.

When you sign up for your 529 plan, you will have a range of professionally managed investment options. You can choose your own mix of investments from the available options. Or you can choose an investment approach that is based on your loved one’s age and when you anticipate they will need the funds. 

Similar to how a retirement fund adjusts the mix of investments based on when you plan to retire, this option will automatically update your investments based on when the funds will be needed. This “keep-it-simple” approach allows you to simply enter your loved one’s age and then let the plan managers choose the investments that make the most sense based on risk and the amount of expected time the funds will be invested. 

Savings Can Be Used for a Variety of Education Expenses

529 plans are flexible and can be used to pay for much more than just tuition at a four-year college. You can use the funds in your plan for other qualified expenses including apprenticeship expenses, trade schools and online universities, as well as up to $10,000 a year for K-12 tuition. 

Funds can be used for both in-state and out-of-state colleges and many overseas universities and study abroad programs qualify as well. 

More importantly, college expenses can include much more than tuition. Students can use these funds to cover room and board, books and supplies, computers and other essential technology. 

Impact on Financial Aid 

Another benefit of a 529 plan is that it has a low impact on a student’s ability to qualify for federal financial aid. Assets saved in a 529 belong to the parent (when they are the account owner), which means they count less when calculating the Expected Family Contribution (EFC) than assets that are in the child’s name. Additionally, thanks to recent rule changes, if a grandparent owns a 529 for the child, those assets are not calculated in the child’s financial aid eligibility at all. 

Benefits of 529 Plans Vs. Roth IRAs and Traditional Bank Accounts

The chart below is a high-level comparison that breaks down the benefits of saving for future education with a 529 plan vs mutual funds, a Roth IRA and a traditional savings account. Do your own research to find the option that works best for you.

 

	529 Account with The Education Plan	Mutual Fund*	Roth IRA	Traditional Savings Account
State Tax Benefits?	Contributions are deductible from NM state taxable income	No state tax benefits	No state tax benefits	No state tax benefits
Federal Tax Benefits?	Tax-deferred growth Tax-free withdrawals for qualified education expenses	No federal tax benefits	No federal tax benefits	No federal tax benefits
Potential for Compound Growth?	A variety of investment options are available	A variety of investment options are available	A variety of investment options are available	There is usually a lower potential for compound growth
Income Restrictions?	No income restrictions	No income restrictions	There are income restrictions	No income restrictions
Age Restrictions?	No age restrictions for withdrawals	No age restrictions for withdrawals	There are age restrictions for withdrawals	No age restrictions for withdrawals
Contribution Limits?	There are high annual contribution limits	No annual contribution limits	There are lower annual contribution limits	No annual contribution limits
*Mutual funds that are not part of a retirement account

Ready to get started? It’s easy. Opening an account with The Education Plan takes about 15 minutes, with no minimum contribution required. Instructions, tips, and answers to frequently asked questions are all available in our Learning Center. 

It’s never too early — and never too late — to start saving for your child’s future education.