Most parents do not take advantage of a key tool for college savings – The Motley Fool

As university costs keep climbing, many parents struggle to pay for their tuition – and many teens pledge for thousands of dollars in student loans. Now, the good news, according to a U-Nest study, is that many parents take the issue seriously, with about 60% reserving funds for their children's education. On the other hand, among the parents who are savings, most do it in a checking account or a savings account, and only 18% use one of the most effective saving tools available: a 529 plan.

If your goal is to pay for some of your children's education and to minimize the degree of debt of their graduates, it is therefore advantageous to invest in a 529 plan. Otherwise, you could sell your children discovered.

The benefits of 529 plans

A 529 plan is a tax-efficient savings plan designed to cover training costs. (Note: Previously, the 529 were used only for higher education, but these days you can also use one for private schools.) The main benefit of saving in a 529 plan is that you can not only invest your money, but enjoy tax-free growth of your investment money.

When you invest in a traditional brokerage account and your investments make money, you have to pay capital gains taxes on them year after year. Similarly, when you earn interest on a savings account, the IRS also benefits. With a 529 plan, you do not pay taxes on your account 's earnings, which not only means you keep more money, but reinvest your earnings year after year for additional growth.

In addition, with a 529 plan, you will probably get a much higher return on investment than you will earn from a savings account. And although not all states offer tax incentives to contribute to a 529, there are some that make offer tax deductions or even credits to finance one.

Now, like most financial products, 529 plans are not perfect. First of all, you should know that if you use your 529's money for non-educational purposes, you incur a penalty of 10%. This penalty, however, only applies to the earnings portion of your account, not the principal contributions. In addition, some 529 plans impose high fees and offer only a limited range of investment choices.

Nevertheless, it is worth opening a 529 if you are serious about covering a large portion of your children 's education. And if you overload a child 529 (for example, this child is receiving a scholarship that significantly reduces tuition fees), you can still designate a new beneficiary, such as another child.

Another option? To contribute some money at a 529, but keep the rest of your college savings elsewhere, whether it is a savings account or an ordinary brokerage account. That way, you'll have more flexibility with some of your money, but you'll also get tax-advantaged growth on your college fund.

If you save for your kids' education, you are smart and you can go one step further and save as efficiently as possible. It is helpful to consider opening a 529 plan if you do not already have one. Your children will thank you later.