All About 529 PlansSubmitted by Alloy Silverstein Financial Services, Inc. on May 6th, 2019
For young families, the immediate cost of raising a child can be testing financially. Just when you thought you were in the clear from student loan repayments and your never-ending car lease, a hungry mouth appears with countless sleepless nights and a hefty price tag attached. But diapers, baby formula, and stuffed toys aren’t the only financial burdens parents should worry about.
In the hypercompetitive world we live in today, a post-secondary degree is essential to earn a foothold in the workforce. Parents have to start preparing a college fund for their children when they are toddlers, and it is no small fee we are talking about either. The non-profit College Board reported that “the average cost of a year of college is $8,893... If you go out of state, that amount will almost triple ($22,203), and the average cost of attending a private university is $30,094” 1. Combine this with the fact that “children born today could end up paying up to four times the current price for tuition if inflation keeps up”2 and the ingredients for an insurmountable load of debt can be quickly envisioned.
So how on earth will you be able to afford this? First of all, be proactive - time is on your side!
The 529 plan should be the backbone of your school savings. This plan is specifically designed for college and qualified withdrawals are not subject to federal tax. Nearly all states provide 529 plans, many of which also offer tax incentives! If your child already has a school in mind, you can prepay tuition at a specific school with this plan. As tuition fees are on the rise each year, paying at current rates prevents inflation.
Started in 1996, 529 plans provide tax incentives for those saving for post-secondary education. The plan allows funds saved to be used at any eligible education institution, which typically includes colleges, universities, vocational schools or any post-secondary educational institute that is currently eligible to participate in U.S. Department of Education student aid programs. Operating much like at 401(k) or IRA, funds deposited into a 529 plan are not taxed, either by the federal government or the state in which the participant resides.
529 funds can be withdrawn for post-secondary education expenses such as tuition, fees, books, and room and board. Along with tuition and related costs, computer technology costs such as the purchase of a laptop computer, or Internet access can be paid for with withdrawals from the plan.
Though originally designed to be used as a college savings plan, the new tax laws going into effect in 2018 now allow funds from 529 plans to be used for elementary or secondary education tuition and expenses as well, with plan participants able to withdraw up to $10,000 annually. It’s important that those considering withdrawal of funds for this purpose check with the state where their plan is located to ensure that they are cooperating with the new federal rules, since withdrawing funds in a non-participating state can mean a hefty penalty.
There are no restrictions for setting up a 529 plan, so you can set one up and name yourself – or anyone, as the beneficiary. Beneficiaries can be changed at any time, and there are no tax consequences when withdrawing excess funds from a current plan as long as those funds are rolled over into another 529 plan. While there are no formal limits to what can be contributed to a 529 plan, plan participants should note that the gift tax exemption for 2018 is $15,000, so any contributions above that amount would have to be noted on Form 709 – United States Gift Tax Return.
There are currently two types of 529 plans available, a savings plan and a prepaid tuition plan, with states typically offering both types of plans. The savings plan is designed similar to a retirement plan, with funds invested as directed. The prepaid tuition plan allows you to pay tuition through installment payments, but typically does not include room and board. Currently, educational institutes can offer a prepaid 529 plan but not a 529 savings plan.
You are not restricted to investing in a plan offered by your own state, though state tax benefits may be limited to plans offered in your resident state. Always consider your home state plan as it may offer state tax or other benefits for residents. Most plans do not restrict school eligibility to the state where the plan originates, though it’s always best to check with the school to ensure that they are an eligible institution under 529 plan rules.
A great vehicle for saving for college tuition and related college expenses, and now even private elementary and secondary school tuition, be sure to check with your state to determine what plans are available and what would work best for you.
So what is the best way to keep track of your savings? The ‘2k rule’ has become an increasingly popular option for parents to ensure their college finances are in check. Fidelity Investments note that you should “Multiple your child's age by $2,000 to stay on track to cover half the average cost of a four-year, public university” 3. This regular reminder provides a simple starting point for parents to pursue their saving goals.
Ronald Donato Jr., CFP®, MBA may be reached at 856.667.6228 or RDonato@asfinancialservices.com.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2018 Advisor Websites.