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SALT LAKE CITY — Saving money now can pay off later, big time — especially as a parent saving for a child's college costs.
Many Utahns are investing in 529 accounts, an investment account that encourages saving and spending on higher education. In fact, Utah is among just three other states that received a gold rating from Morningstar for its 529 plans, according to UESP.
When it comes to saving for college, Jason and Carolyn Miller know the key is starting early and saving often.
"We have a 1 year old," Jason Miller said. "We are actually celebrating her birthday tomorrow. We started the 529 when she was only 6 months old. We also have another baby boy who is due Aug. 25."
They make regular deposits into a 529 college savings plan — a kind of savings account that has garnered much attention in recent years, especially for its tax benefits.
"All of your contributions and earnings come out tax-free to you when to when used to pay tuition fees, room and board, books, supplies and equipment," said Michael Conrath with J.P. Morgan Asset Management. "That is the core benefit of a 529 plan, and that's probably the key reason why over 10 million families have invested $180 billion today in them."
Related:
Utah's 529 plan ranks high nationwide
Some financial analysts say if you are looking at investing in a 529 college savings plan, check the plan carefully first. But Utah's official state plan still gets high marks.Nearly every state offers a 529 plan, and some plans get an additional state tax deduction on contributions, but state lines don't restrict plan participation. Participants can choose a plan that works best for them, based on risk tolerance and amount needed to save.
Most of Utah's 529 accounts are owned by people out of state, because the plan is expected to outperform relevant benchmarks and other 529 plans based on risk over at least a five-year period.
The Millers set up a 529 plan for their daughter, Clara, but that could change.
"My daughter may get a scholarship. If that happens, then the money in the 529 would be rolled to the second child," Jason Miller said.
That may be one of the biggest downsides to 529 plans: Funds can only be used for qualified higher education expenses, otherwise earnings withdrawn get hit with a 10 percent penalty and are taxed at the owner's federal income tax rate.
Some financial advisers say custodial accounts held in a child's name, not a parent's, may be a better option.
"What that allows you to do is buy lower-cost options and also asset classes that are diversified that can reduce the vitality," said Ivory Johnson with Delancey Wealth Management CFP. "Then as an added bonus … you can take the account and you can transfer it to a plan and then you can take advantage of the financial aid advantages that the 529 has."
