Important Benefits Of 529 Plans
By Michael Vaughn, CFP®
Regardless of whether your child is 2 or 12, the thought of college has probably crossed your mind. In the busyness of life and never-ending financial pressures, it is all too easy to put saving for college on the back burner. But before you know it, you’ll be planning college visits and filling out applications.
Don’t get caught unaware and unprepared for college. Your child’s education is one of the most important investments you can make, and with today’s costs, it pays to plan ahead. As we approach National 529 College Savings Plan Awareness Day, it’s a good time to ask yourself this question: Have you started saving for your child’s future education costs? If not, here are some important benefits to consider when thinking about paying for college with a 529 plan.
Why Do I Need To Save For College?
First, a note on rising tuition costs. If it’s been awhile since you went to college, you might be wondering why it’s so critical to save for your child’s education rather than just take care of it when the time comes. Well, tuition rates have increased at a faster pace than many other expenses over the past decade, and it doesn’t look like they will slow down anytime soon. In the past 10 years, tuition fees have risen an average of 1.8% a year for private schools and 1.9% for public colleges. (1)
And that’s just tuition, let alone room and board. With these kinds of numbers that keep increasing, a part-time or summer job just isn’t enough to pay the bills. Saving early and taking advantage of compound interest could save your financial life down the road. With that in mind, let’s discuss 6 important benefits of using a 529 plan to save for college.
The Benefits Of A 529 Account
A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you to save anywhere from $235,000 to $529,000 per child, (2) and then use it, tax-free, for qualified education expenses. As an added benefit, you are not limited to using the plan offered by the state in which you live. Some states will give you a tax credit for using their plan, but in many cases, it’s worth it to shop around. Here’s what you can expect.
1. Tax-Free Earnings
You do not have to pay taxes on earnings in a 529 as long as it is used for qualifying higher education costs. (3) There are no federal taxes due, and most states do not tax the earnings.
2. State Tax Deductions
Most states also offer additional state tax deductions for contributions made to their own state’s plan. As 529 plans are state-sponsored, you would need to check with your particular state to see what specific tax advantages they offer. For example, California does not provide a deduction, (4) but taxpayers in Missouri may deduct up to $8,000 ($16,000 if you are married filing jointly) of our 529 plan contributions. (5)
3. Plan Flexibility
You do not have to contribute to the plan in the state in which you live. Each state’s plan has different rules, limits, and perks. Every year, Morningstar releases their list of the best college savings plans to help you sift through the choices to find the plan that is the best fit for you.
Speaking of flexibility, you can also reassign a 529 account to a direct relative if the named beneficiary doesn’t use all of it.
4. Recent Changes
As of 2017, 529 account holders can now use up to $10,000 annually on educational expenses prior to college. This includes tuition expenses at private, public, and religious K-12 schools. And thanks to the SECURE Act of 2019, you can also use your 529 savings to pay for apprenticeship fees, homeschooling, or up to $10,000 of qualified student loan repayments (including those for the 529 plan recipient’s siblings). (6)
5. Anyone Can Contribute
Contributing to a 529 plan is not a privilege reserved for the parents of the beneficiary. Anyone can give toward the costs of higher education: grandparents, other family members, or friends.
6. Parental Control Of Funds
There is no need to worry about your teenager mishandling the funds because you, the parent, remain in control of the assets. The child that you are saving the money for is the named beneficiary of the account, but you are still the owner. They cannot bypass you to access the money.
7. Financial Aid Is Still Possible
Your child’s 529 account does factor into the Free Application for Federal Student Aid (FAFSA) calculation, but since the account is in the parent’s name, only 5.64% of the assets will count, meaning the impact on your child’s eligibility for financial aid is not devastating.
Ready To Open A 529 Account?
If you think a 529 plan might be a good idea for you and your family, Pinnacle Family Advisors is here to help. Our team can explain all your 529 plan options and help you decide which is best for your individual college planning needs. If you already have a 529 plan set up, it is important that you have an experienced professional managing the investments in your account to make sure you are still on track toward your goals.
Let us help you prepare for the future. With our guidance and expertise, you can start saving for your child’s future today so you can ease the worries of tomorrow. To get started, schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or contacting me online. Also, be sure to check out our video on saving for college here.
Michael Vaughn is a Certified Financial Planner™ (CFP®) and Vice President at Pinnacle Financial Advisors (PFA) with 20 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® designation in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. He and his family attend Hill City Church, where he serves as an elder. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.