June 2023
Jumpstart College Savings with a 529
Saving for college is one of the most common financial priorities for young families. College tuition is on the rise and shows no signs of slowing down. Business Insider rates college tuition as the second most expensive item the average American will pay for over a lifetime, right behind buying a house. While daunting, if you start saving early for your child’s education, you can build up a sizable education nest-egg.
One option for college savings is utilizing a 529 plan. A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses. 529 college savings plans work much like a Roth IRA by investing your after-tax contributions in various funds. The funds grow tax-deferred, and withdrawals are tax-free when used to pay for qualified educational expenses. The 529 plan account will fluctuate in value based on the performance of the investment options. There are contribution limits on 529 plans, although these are quite high. In addition, certain states allow for deductible contributions: Illinois allows married couples to deduct up to $20,000 annually. 529 plans can also be a great investment vehicle for grandparents looking to help with college costs for grandchildren. It can be used to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments.
While there are many benefits to 529 plans (e.g., tax-deferred growth and tax-free withdrawals), there are some restrictions to keep in mind. For example, non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the distribution. In addition, 529 plans generally don’t offer self-directed investments.
Another option for college savings is utilizing a transfer on death investment account (this can be owned individually or joint). In this situation, the parent/guardian sets up an investment account in their own name. The account is ‘earmarked’ for future college expenses. There are no contribution limits on this type of account, and generally there are no investment restrictions. However, because this is essentially an ordinary investment account, there are no tax advantages to setting it up. It may be worth considering tax advantaged investments (municipal bonds, non-dividend paying stocks), although ultimately the risk appetite and timeline of the account’s purpose should dictate its allocation.
When saving for college (or any major expense), it is important to understand the different options. The examples above are just a few options to consider, each with its own advantages and disadvantages. If this is something you would like to discuss in more detail, please reach out for a consultation.
https://www.advisory-one.com/resource-center/money/what-can-you-buy-with-529-distributions
https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
https://www.savingforcollege.com/article/what-are-the-pros-and-cons-of-using-a-529-plan
https://www.savingforcollege.com/article/5-ways-to-spend-leftover-529-plan-money
Content in this material is for general information only and not intended to provide specific advice or recommendations, or a substitute for specific individualized tax or legal advice for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. No strategy assures success or protects against loss.