Wealth Management Blog

Posts tagged 529 Plan

What’s Your 529 College Savings Strategy?

By JJ Burns

May 29, 2018

As a CFP® professional, one of the most important lessons I’ve learned is that before you can talk savings strategies for your children’s college education, you must be crystal clear on how you are going to pay for it. By taking a hard look at your current financial situation and current family dynamic (including how many children you have), you will gain valuable perspective on how much money you can realistically contribute.

Throughout this exercise, you should be asking yourself the following questions:

  • Do I want to pay, in full, for my child’s college education?
  • Do I want my child to share in some of the expense?
  • Do I want to apply for financial aid?
  • How do I feel about my child having to repay loans?
  • Do I realistically believe my child will get a scholarship?
  • Do I want my child to have unlimited choices, or will their options be limited by their scholarship and financial aid offers?
  • Is there anyone else in our family who wants to help fund my child’s education?
  • What are my views on public versus private universities?
  • What is my opinion of advanced education such as an MBA, law degree, etc. and how will this be funded?

Take a few minutes and write down the answers to these questions as they will create a roadmap for developing a sound long-term college savings plan.  You can then begin working with your CFP® professional to develop a savings strategy to meet your goals.

For example, saving for Harvard College with a 2018-2019 tuition of $46,340 (or $67,580 with room and board) is going to be very different than saving for Binghamton University with a New York State resident tuition of $6,870, or the University of Michigan with a nonresident tuition of $23,975.

For many families, a 529 plan can form the foundation of their college savings strategy because:

  • You can invest in a 529 plan regardless of how much you earn. There is no minimum to get started, so the sooner the better!
  • The account grows tax-free. Distributions are free of federal and most state income taxes when used to pay for qualified education expenses (tuition, books, computers, etc). This is especially advantageous if the account is started when the beneficiary is very young and has ample time to reap the benefits of the tax-free compounded growth. Further, if you have multiple children, the tax-free benefits that are not used by a 529 beneficiary can be transferred to a sibling.

Anyone can own an account for a beneficiary (e.g. relatives or friends) or contribute to a 529 plan. Another bonus? Accounts owned by non-parental relatives/friends will not have an impact on the student’s eligibility to receive financial aid. There’s also the option to change the beneficiary on the account from one eligible family member to another without penalties or taxes. As of 2018, a 529 plan can also cover $10,000 in annual tuition expenses for elementary or secondary public, private, or religious schools. Not all states allow tax-free distributions for K-12 education yet, so check with your state before you make any withdrawals.

For most people who don’t have a plan and don’t consider the many variables that affect them, the biggest issue to be aware of is the penalty. Earnings on distributions not used for education expenses are taxed as ordinary income at the recipient’s federal tax rate and usually incur a 10 percent penalty tax.

For more information and guidance, a CFP® professional can help you clarify your college savings objectives and determine which plan and investment options are best suited to help you meet your goals. 

Pros and Cons of Section 529 Plans

By JJ Burns

February 10, 2013

A Section 529 college savings plan can be a tax-smart way to help your children pay for their higher education. But you should also be aware of several potential pitfalls of this planning device. Here’s a brief rundown on the main pros and cons.

The Pros

The account can make money.

A Section 529 plan works much like a mutual fund, with account assets typically invested in equities by professional money managers. They do the hard work while you sit back and watch the account grow.

Count on the tax benefits.

Contributions to the plan are gift-tax-free, the earnings within the plan are income-tax-free and any distributions that are used for qualified education expenses are also income-tax-free. That’s a hard combination to beat.

Funds may be invested automatically.

Frequently, a plan will let you have funds automatically withdrawn from your checking or savings account. Not only is this convenient, it also takes some of the guesswork out of saving for college.

Contribution limits are generous.

State law effectively controls the amount you can sock away in a Section 529 plan, but the limits are favorable. In some states, you can contribute as much as $200,000 to your child’s account, which should be sufficient to cover tuition for four years at most schools.

Account assets are portable.

Although 529 plans are sponsored by individual states, the money can be used to pay for college wherever your child attends. Also, if funds are left over when your son or daughter completes school, you can use the excess to pay college expenses for another child. You don’t have to close the account until the youngest child reaches age 30.

The Cons

Funds must be used to pay qualified expenses.

If you make a withdrawal and use the cash for any other reason—say, to pay emergency medical expenses—the distribution attributable to earnings is taxed on both federal and state levels, and you’ll owe a 10% penalty. You’ll also be taxed on any leftover amount you receive after closing the account.

The investments are out of your hands.

This is the flip side of having professional money management. If you’re a savvy investor, you may prefer to have greater control over the funds. Should you be inclined to use a different investment option outside of a 529 you’ve established, you’ll be taxed and penalized if you withdraw funds and invest them elsewhere.

It might affect financial aid eligibility.

The impact of a Section 529 plan is usually negligible if held by a parent. Nevertheless, it must be factored into the equation to determine the “expected family contribution” (EFC) for college costs.

For most families, Section 529 plans are a good deal, but they’re not for everyone. We can provide the necessary guidance.