Tax tips for 529 plans

A 529 plan offers a number of tax breaks, and allows you to save for education expenses for children or grandchildren. Watch the video above or read the transcript below to learn more about the advantages of these accounts.

Tracy Byrnes: The cost of college is insane these days. And you need everything you can to help yourself out. So 529 plans are this amazing tax vehicle that allows you to give money to your child or grandchild and let them spend it on any kind of education expense tax-free.

Lisa Greene-Lewis, TurboTax expert and CPA, here with us to give us all the nitty gritty on this. OK. First of all, so let's talk about what exactly a 529 is?

Lisa Greene-Lewis: It's a tax advantage plan and it's designed to help you save for your child's education. And it can be used for their college education. And now a couple of years ago, they implemented that it could be used for K through 12.

Tracy Byrnes: So if you have a kid in private school, you really should think about these things. So when you put this money into a 529 plan, who creates these plans? Who can donate money to these kids?

Lisa Greene-Lewis: So if you open one up, you're contributing, but you can also have family members contribute to the plan as well. So instead of grandparents giving them toys that they're just going to forget about, it's always good to have them contribute to the 529 plan.

Tracy Byrnes: So you put after-tax dollars into this plan. Now, in an ideal world, we give birth. We open a 529 plan. But that just doesn't happen, right? And then, as life happens, and then next thing you know your child is 13 or 12 or whatever and you're like, holy heck, college is right down the road. What do I do? Should I still consider opening one?

Lisa Greene-Lewis: Yes. I think you should still consider opening one regardless if you open it when they were born. You can still contribute. You can have family members contribute. If you end up getting a windfall of money, you can contribute more to it. So I think it's always best to start—the sooner, the better. But I would—

Tracy Byrnes: Right. So you can front-load these accounts, which is really cool. And the great part, the most amazing part about it is, the money grows tax-free. When the child pulls it out to use it for any kind of school, K through 12, college, there's no taxes, correct?

Lisa Greene-Lewis: Correct. That is definitely the benefit of that, growing tax deferred.

Tracy Byrnes: Right. And so aside from tuition, there's a bunch of other things you can use this money for, isn't there?

Lisa Greene-Lewis: One thing—and I know you and I talked about this before, Tracy—is, let's say your child had scholarships already and was not going to use it or wasn't going to college, you can actually give it to another child or someone in your family.

Tracy Byrnes: Yeah. So that's the beauty of these accounts. They can change ownership. So if you have a child that's a rock star, gets all these scholarships, the money can go to another. You can also potentially hold on to the account and give it to your child's child someday if indeed and just let the money grow. But you can also use this money too for laptops and room and board and things like that, right?

Lisa Greene-Lewis: Yes, yes. So it can be used for their any expense related to them going to school. You would be able to use it.

Tracy Byrnes: It's a super cool technique. There's not many perks we get from the government. This is one of them. And while tuition keeps going up and up, Lisa and I know this firsthand, you need all the help you can get. So take advantage if you can of a 529. Lisa Greene-Lewis, TurboTax expert and CPA. Thank you for all that.

Lisa Greene-Lewis: Thank you for having me.