The 411 on 529 College Savings Plans
With the exponentially increasing cost of college I want to make sure my family takes advantage of the opportunities available. The first is time – the earlier we start saving, the longer funds have to grow and the more time to take advantage of the ever powerful function of compound interest. The second is the use of tax advantage vehicles. Every dollar we save towards our child’s education serves as a deduction for state income tax purposes. On top of that, any investment gains which are used to cover the expense of higher education is federally and state tax free, as opposed to being taxed at the capital gains tax rate.
Saving over an 18 year timeframe is pretty powerful. For illustration purposes, let’s assume, my husband and I contribute $150.00 per month towards our son’s education into a 529 Plan from the month he is born (May 2018) until he reaches the age of 18 (May 2036). Using a moderate growth asset allocation with an average annual return of 6%*, our total contribution of nearly $20,000 over that 18 year period could potentially grow to a little more than $58,000 (figures rounded to the nearest $1,000)! That’s an additional $38,000 available to cover the cost of college versus us having simply put the 150.00 aside in a savings account!
*This hypothetical example does not represent real returns of an actual investor or investment. Actual investor results will vary.
Beyond the tax advantages and investment features of a 529 plan, additional benefits include:
- Protection from creditors
- Many 529s provide asset protection against creditors. State laws differ, so you should seek legal advice.
- High contribution limit
- Many plans let you contribute over $300,000 over the life of the plan.
- Unlimited participation
- Anyone can open a 529 college savings plan account, regardless of income level.
- Flexibility
- Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as rollover the money in your 529 plan account to a different 529 plan once per year without income tax or penalty implications.
- Wide use of funds: Money in a 529 college savings plan can be used to pay the full cost of any college or graduate school in the United States or abroad that's accredited by the Department of Education, and for K-12 expenses up to $10,000 per year
- Accelerated gifting
- 529 plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren's education. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($15,000 in 2018) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $75,000 and married couples can gift up to $150,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.
As tuition costs climb higher than ever, saving for education opportunities is one of the most important decisions you can make.
If you or someone you know would be interested in learning more about 529 plans or how to establish a plan please do not hesitate to give me a call. As always, I am more than happy to assist in any way I can.
Sincerely,
AMANDA SIMCONIS GUNN, CDFA®, AAMS®Financial Advisor
Keep in mind investing always involves risk and you may incur a profit or loss. Past performance is not indicative of future results. No investment strategy can guarantee success. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. As federal and state tax rules are subject to frequent changes, you should consult with a qualified tax advisor prior to making any investment decision.
