Starting the process early to save toward the college costs of a child or grandchild can help limit how much your future student will have to borrow. In this article you’ll be introduced to 529 education savings plan, a tax-advantaged way to invest toward education expenses.
For the 2019-2020 school year, the costs for a four-year private college averaged $53,980 per year for tuition, fees, room and board, books and supplies, transportation and other expenses. Assuming a college-cost inflation rate of 6%, a parent may need $399,000 in 2029 to pay college expenses for today’s 9-year-old . And that’s for just one child.
With costs so high, many students and parents are taking on significant student loan debt to pay for college. Roughly two-thirds of college seniors who graduated in 2018 did so with loans, with an average debt burden of $29,200.
# What is a 529 Plan and Why Consider One?
Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged savings vehicle which allows you to invest for future education expenses. A 529 plan creates an incentive for families to invest toward education costs because earnings in the plan can be tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional state tax deductions or tax credits. Additionally, assets in a 529 plan are outside of the account owner’s estate for estate-tax purposes.
A 529 plan can also offer flexibility. Some investments that are used for education funding require that the assets be given to the beneficiary when they reach a certain age. If you open a 529 plan, as the owner of the account, you continue to make all of the decisions. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.
The definition of qualified education expenses now includes tuition for K-12 schools as a result of the Tax Cuts and Jobs Act of 2017. Note that qualified withdrawals for eligible K-12 tuition are limited to $10,000 per beneficiary per year. Tax treatment will vary by state.
# 529 Contribution Limits
Anyone can create a 529 plan for a designated beneficiary, and those who wish to contribute to the account may do so. These plans typically have high lifetime contribution limits, beginning at $200,000-$300,000 and sometimes going as high as $500,000. Annual contributions of up to $15,000, or $30,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 plans employ a special rule: An upfront contribution in one year of up to $75,000, or $150,000 for married couples—the equivalent of five years’ contributions—may be made without any gift tax consequences. This five-year gifting election can give your assets more time to grow if you’re able to make such a contribution, and the “accelerated gift” is excluded from the donor’s estate.
# Investing Early for Future College Costs
When it comes to investing in a 529 plan, typically the earlier you can start putting money away, the better.
Still, it’s never too late to start saving for college. Money set aside when a child is 16 will still have several years to grow, assuming you use those funds to pay for the later years of undergraduate expenses, or even graduate school.
It is important to advise with a financial advisor who can help you choose a 529 plan as part of your wealth strategy. He or she can also offer valuable guidance as it relates to regulatory changes and during times of market volatility.
To sum; a 529 plan is a convenient, flexible and tax-advantaged way to invest for a child’s education expenses.
# Start Saving Today
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