The 529 Plan: Saving for Your Child’s Future

The 529 Plan: Saving for Your Child’s Future

Well madam and/or sir, I’d like to start this off by first saying congratulations.  If the following article directly applies to you that means that you or someone close to you are the proud parents (or future parents) of a beautiful child; something that I cannot in anyway shape or form relate to but one day aspire to.

Bottles, formula and diapers.  Crayons, sports leagues or dancing classes.  Laptops, first cars and proms.  These are merely a few of the expenses that occur over the course of raising a beautiful, spitting (literally) image of yourself.

The One Often Overlooked Expense

But let not us forget one of the most significant expenses pertaining to your child, the one expense that covers the four years that will likely have the most dramatic impact on your child’s life.

College.

If you’re planning on having your child attend some form of higher education, news flash, your overall financial situation will drastically change in approximately 18 years’ time.

The Facts

Today the average annual tuition including room and board for a public 4 year In-State University is $19,548 and $43,921 (Collegeboard.org) annually if your child attends a private 4 year institution.  If you think these costs are pretty substantial wait for this fun curveball.  There’s one more minor detail we cannot forget; inflation.

According to the College Board, college tuition has increased over the last decade at a rate of approximately 5%.  That means that when your child attends college 18 years from now, the average tuition including room and board for a public 4 year In-State University cost would be approximately $47,045 a year and $105,701 a year for a private 4 year institution.

So in 18 years given our previous assumptions, it will cost a total of approximately $188,180 to send your child to a 4-year public university and approximately $422,804 for a 4-year private university.

Let me repeat:

$188,180 for public & $422,804 for private

Where will this money come from?

I’ll give you a minute to pick your jaw up from the floor.  As you can see, unless you have some sort of trust-fund, win the lottery or your child is the next 4-star athlete out of high school, a pretty large financial cost will be come knocking in roughly 18 years.  And let’s face it, you were no 4-star athlete in high school so we shouldn’t hold our breath waiting for that free-ride scholarship.

Based on these future costs it will be almost impossible to pay for your child’s college tuition without implementing some form of systematic savings plan.   One of the most effective vehicles to implement this systematic college savings plan is the 529 Plan.

 What is a 529 Plan?

I’m glad you asked.  A 529 Plan is a tax-advantaged investment account where money can be invested to pay for the future college expenses of a beneficiary (your child).

The beauty of the 529 is that all contributions are allowed to grow tax-deferred and withdrawals from the account are tax-free if the funds are used for college-related expenses at accredited academic institutions.

So obviously I can buy a keg for our Fraternity’s Spring Fling and that would constitute a “college-related expense” right?  Not exactly, college-related expenses include:

[table]

Qualified Higher Education Expense,Not Qualified Higher Education Expense
Tuition,Discretionary college costs like intramural sports and Greek Life
Books,Transportation Expenses
Mandatory school fees,Parties
Required computers,Kegs
Necessary school supplies,Beer
Room and board for at least “part-time” students,Red Solo Cups
Off-Campus Housing that matches university off-campus housing estimates, Ice Luge
[/table]

The downside is that if the funds from the 529 are used for that Fraternity party keg there will be a 10% penalty on the earnings portion withdrawn from the account.

The 3 Main Players of the 529

The Account Owner

The individual opening the account.  They could be anyone who’d like to open a 529 for the Beneficiary whether it be a parent, grandparent, aunt, uncle, family friend or a neighbor.  The Account Owner has ultimate control of who is the beneficiary or the person to receive the money down the road.

The Beneficiary

The person for whom the account is opened for and who will receive the account proceeds when the money is needed to pay for higher education.

The Government

The one giving you the advantage of tax-free growth and tax free withdrawals if the money is used for qualified higher education expenses.  They are also the ones who collect the penalties and other taxes if Jimmy uses his 529 funds for the annual homecoming kegger.

Other Benefits of the 529

Variety of Higher Education Options: Funds can be used at a variety of eligible vocational or trade schools, public and private undergraduate/graduate universities and community colleges.

Tax-Advantaged: As mentioned earlier earnings on within a 529 plan are tax-deferred and if withdrawals are used for qualified education expenses they are tax-free.

Anyone Can Contribute: Grandparents, extended family, neighbors and even family friends can all contribute to a 529 for the beneficiary.  Nothing says Happy 1st Birthday like a deposit into a child’s 529 account.  Well that and maybe like a Build-A-Bear or something?

Large Annual Contribution Limits: A single person can give $14,000 a year to a 529 per individual without any gift tax consequences.  If a couple is filing their taxes jointly they are able to give $28,000 to a beneficiary’s 529.

Estate-Planning:  An individual can gift a single $70,000 lump sum contribution to a 529 in a single year.  This contribution is treated as if it was spread over a five-year period.  Couples filing jointly can gift $140,000 to a 529 in a given year and are able to spread it over a five-year period as well.

Account Owner can retain control of the money:  If one of your children happens to be that 4-star athlete out of high school and goes directly to the Majors, what happens to all the 529 college money you saved for them?  Well if the 4-star athlete has a less athletically gifted sibling, you as the Account Owner can change the beneficiary to your uncoordinated child and have them take advantage of the 529 money.

Don’t Forget the Basics

Compound interest, investing over long periods of time, save more earlier have more later, consistently investing; any of this ring a bell?  It should because these are the main philosophies behind saving money for retirement.  Also any dollar amount saved no matter how small can make a significant difference in the long-run.

Funny thing is, the same principles that apply to your 401k, Roth IRA, or Traditional IRA still apply to saving for almost any other financial goal and that includes your child’s education costs.

In Conclusion..

A 529 account is much more than a simple savings account.  Whether your child goes to Harvard or the local community college, every tax-advantaged dollar saved in a 529 helps them toward an education that will prove invaluable for the rest their lives.

And at the end of the day, as a parent, grandparent, relative or family friend don’t we just want to give those we care about the best opportunity for future success?  I cannot think of a better way than using a 529 as one of the many foundations to support your child’s future successes.

Any opinions are those of your advisor and not necessarily those of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Investors should carefully consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing.  This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing.  Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. 

Rules and laws governing 529 plans are varied and subject to change.  There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated.  Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.  Investors should consult a tax advisor about any state tax considerations of an investment in a 529 plan before investing. 

 

Comments are closed.