How are you saving for your kids’ college education?
May 29 is National 529 Day
By Laura Chiesman
Planning for the expenses of children’s college educations is an issue almost every family will face. There are more options today than ever before which complicates the decision making process. While each family’s needs are different and a combination of solutions is often advisable, it’s helpful to begin with a general look at the very popular 529 Plan options.
There are two types of 529 Plans – Prepaid and Savings plans. Both allow parents, grandparents and others to set up plans for a child or multiple children. The plans are controlled by the owner, even after the child reaches the age of majority. The owner can even change beneficiaries to qualified relatives if the original beneficiary decides not to attend college, or if a change is desired for any other reason.
Prepaid 529 Plans are just what the name implies – you contribute to a plan now to lock in today’s tuition rates and other education costs at a future date. Prepaid participants are not subject to the risks of investing in the stock market but, if the funds are withdrawn and not used for educational expenses, the participant will receive back the amount they contributed, with little or no growth to show for the time the money was in the plan.
Prepaid Plan benefits are state specific – if you fund a Florida Prepaid Plan, for example, the student gets the full benefit only if they attend a qualified Florida school. In our example, the Florida plan funds could be used at a college in another state, but the benefit is not guaranteed to cover the costs in that state. There is actually at least one plan available that offers prepaid tuition to over 270 private colleges around the country.
529 Savings Plans offer investment options that provide tax-free investment growth. Contributions are invested in age appropriate portfolios and these investments are subject to the risks and returns of the markets so starting the plan early is beneficial. Investment growth is tax free and, when the money is withdrawn from the account, no taxes are paid assuming the money is used for qualified educational expenses (e.g. tuition, fees, books, supplies and equipment, and reasonable costs of room and board for students who are enrolled at least half-time). If the funds are withdrawn and not used for qualified educational expenses, any earnings on the account will be subject to income tax and a 10% penalty. Unlike the prepaid plans discussed above, all 529 Savings Plans can be used at accredited colleges in any state and at many international schools.
Many families will use a combination of options such as saving for a portion of the expected expenses, often using a 529 Savings Plan, and planning to fund the balance with parents’ assets, scholarships and other awards.
Planning for college is an important component of a comprehensive financial plan. Each family will have different considerations, including ages of children, financial aid needs, tax and estate planning considerations. National 529 Day is a great reminder to review your family’s college savings or to start the process. Contact us today to schedule your complimentary consultation with one of our WealthCoaches.
About the Author:
Laura K. Chiesman, CFP® WealthCoachTM
• Certified Financial PlannerTM Professional
• Financial Planning Association Member
• University of Central Florida, BSBA – Finance