I knew about 529 college savings plans but always thought it was a way to save money in order to send your children to college in the future. It wasn’t until I was in grad school when I learned that 529 plans can be used to help pay for your MBA. I learned how 529 plan contributions grow tax free as gains aren’t taxed and that there are tax benefits for 529 plan contributions. At the time, the tax benefits for 529 plan contributions were almost $500/ year in state income taxes in Illinois through the 529 plan contribution tax deduction. Enrolling in a 529 plan for your MBA will help you save money to pay for your MBA degree and avoid student loans.
What Is A 529 Plan for MBA?
A 529 plan for MBA is the same exact plan as a 529 college savings plan. It is a tax-advantaged savings plan to encourage savings for future education investments. They are legally known as “qualified tuition plans” and are sponsored by states, state agencies and educational institutions. All 50 states sponsor at least one 529 plan. There are two types of 529 plans: education savings plans and prepaid tuition plans. Education savings plans let a saver open up an account to save for a beneficiary’s future qualified higher education expenses. That beneficiary can be yourself or someone else. Prepaid tuition plans let you pre-pay all or parts of the costs of an in-state public college education that can also be converted for use at private and out-of-state colleges.
529 Plan Investment Options
Each 529 plan offers multiple investment options. It’s up to you to decide which option or options are best for you based on your risk tolerance and your time horizon for using the money. As part of this selection process, it’s also important to look at the fees for each investment option. Fees do differ by investment.
529 Plan Qualified Expenses
Typically, the first thought that comes to mind is tuition, but the qualified expenses are actually broader than that. You can use the funds in your 529 account to cover a variety of education expenses including tuition, fees, books and a computer. The funds in your 529 account can be used at any accredited institution.
529 Tax Benefits
529 plans are funded with after tax dollars but money earned on the investments in a 529 plan grow tax free and you do not pay any taxes when you take money out to pay for qualified expenses, similar to a Roth IRA. Additionally, many states offer tax deductions or other benefits on the contributions you make to a 529 plan. Over 30 states offer tax benefits for contributing to 529 plans which are outlined here. Benefits vary by state so be sure to research what your state offers.
529 Plan for MBA Personal Experience
I live in Illinois and got my MBA at a college in Illinois. I enrolled in the Illinois 529 plan (education savings plan) through Bright Start. Illinois in 2019 has a flat state income tax of 4.95%. Single filers can deduct up to $10,000 a year. This means they expect to save up to $495 / year in state taxes. Joint filers can deduct up to $20,000 / year. This means that they can expect to save up to $990 / year in state taxes. My part time MBA spanned 4 calendar years. I made the full contribution I was allowed to deduct for 3 years. Each time used it to help fund tuition the following calendar year.
I usually aligned my 529 contributions to getting my bonus or selling my ESPP shares. Since I could deduct up to $10,000 a year I would contribute that amount. I made my 529 contribution all at once. You can also set up automatic investments from your bank and possibly with your payroll so you have smaller, continuous contributions throughout the year. By contributing $10,000 / year I saved almost $1,500 in state taxes. When I received my tax refund check I put it directly toward my next tuition bill. I also made some money on the investments and I wasn’t taxed on the gains. I found the whole process very easy with the ability to do everything online. It only taking a few days for the funds to clear when I needed to use the funds for my tuition bill.
529 Plan For MBA Additional Resources
Each state has certain restrictions about this deduction. Be sure to learn about what your state offers and what the restrictions are. By pure chance, in hindsight I learned I picked one of the best 529s offered but it is best to do your research first! I found a blog post by Smart Money Mamas very helpful which goes into great detail how to choose the best 529 plan for yourself or your family.
Are you enrolled in a 529 plan for your MBA? How did you decide which plan to enroll in?