Do you have a child, children or grandchildren who you want to go to college? Are there education expenses that you could be planning for that you want to address now? If so, a state-sponsored 529 plan may be the right fit for you and your needs. As a financial planner, it is my, or any planners, duty to put our clients in the best possible situation to achieve their financial success. Just as with a retirement account it is never too early to start saving for a future education expense that your family will incur. There are many ways in which you can save for college and other education expenses, but one of the best and most popular is indeed a state-sponsored 529 plan.
First, you need to ask yourself what you will need regarding funding? To reach this amount it is best to look at some college tuition projections at various schools and universities. You can Google eduction expense forecast calculator and get an idea what the expense should be when the person you are saving for will reach the age at which point the funds will be needed. You also need to look at your current expenses and spending habits to better be able to judge how much you will be able to save.
Another thing you will need to consider is how much of the expense do you plan on covering? Many parents worked while in college to help pay for it and you may do the same in regards to your children. Then there is the issue of college loans that can be taken out to assist in paying for college. Here you will want to consider having the child take out the loan as they will have a longer period to pay for it and you do not want to hurt your retirement savings at this point. It may seem to mean to have your child take out the loan, but you never want to jeopardize your retirement as you cannot rely on anyone else to find that for you. And then there is the chance of getting scholarships to help pay for the tuition of college. These are not guaranteed, but by mid-high school, you should have an idea is your child will qualify for these types of assistance for college expenses.
Here are just some of the benefits of a state-sponsored 529 plan. One, there are relatively high annual contribution limits established, and grandparents may gift up to five years worth of annual gifts under the IRS terms to a grandchild in one year. That allows the principal to grow that much longer which is a good thing to happen. The contributions will be allowed to grow tax-deferred for up to 20 years or so while you are in the accumulation and payout phase of using a 529 plan. That means any contribution made early has the chance to grow into a sizeable amount by the time college arrives. And then provided you use the proceeds on a qualified education expense, the proceeds of the 529 are tax-free. If started early these plans can really provide a substantial financial benefit when it comes time to pay for college expenses.
All in all, the 529 plans offer a wide range of options in which you will be able to save for education expenses. You are not limited to your own state’s 529 plan but may invest in any state’s plan. And not all state plans are created equally or have the same types and quality of investments. But in some states, you will receive a tax deduction for contributions made to your own state’s plan so that is something you may wish to consider.
And with the passage of the new tax bill, the 529 plans are no longer limited to college expenses. Now you may use a 529 plan to save and pay for up to $10,000 towards elementary and secondary school expenses.
Some of the downsides to using a 529 plan are it must be used for a qualified education expense. That typically means tuition, room, board, and books. Then you may save, and your child decides not to go to college at all leaving you will a potentially sizeable amount of money. And then we have the issue of your child may get scholarships and not need all of the money you have saved. Not a bad position to be in but it can happen. Now, if any of the scenarios happen in which you do not need all of the funds you do have a few options. One you may change the beneficiary of the account to another family member. Or you can simply pay a 10% penalty and the taxes and withdrawal the funds and use them for something else.
As I alluded to earlier, not all state plans are equal. Some states offer a wide range of investment options while other states do not. Are lower fees and better investments worth not receiving a tax deduction? That is for you and your financial planner to decide as each situation is unique to that family.
If you have any questions or have any comments, please feel free to contact me or leave a comment here.
