Saving for College With a 529 Plan

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Rising Costs of College

As many high school students and their parents set their sights on higher education, the question of “How much will this cost?” has become just as commonplace as “What school do I want to go to?” and “What will I study?”. It’s no surprise when one sees just how much college tuition has grown in the United States, illustrated in the graph below from Business Insider. The financial requirements to pursue a degree beyond the high school diploma continue to mount, with no indication of a slowdown anytime soon.

An Overlooked Solution, the 529 Plan

While tuition may continue to rise, there is also a tax-friendly solution that would put your college savings to work as well: this is the 529 plan. If you or your loved ones know their academic or professional goals extend beyond the high school diploma, this is absolutely something worth discussing with your financial advisor.

The 529 plan is the academic equivalent of the Roth IRA’s utility in retirement savings:

  • After-tax dollars are contributed to a tax-sheltered account with investment options of various risk tolerances
  • Tax-free growth on earnings, dividends, and interest 
  • Tax-free withdrawals on all qualified expenses

A key difference from the Roth IRA is contribution limits. Technically, there are no contribution limits to a 529 plan except for lifetime total limits, which vary from state to state. However, with the gift tax coming into play for amounts over $15,000 for individuals and $30,000 for those who are married filing jointly, those are the implicit annual limits if taxes on those contributions are to be avoided. 

There are two other alterations to keep in mind as well: many states will allow some form of state income tax deduction on 529 contributions, and the ultimate beneficiary of the funds can be changed. This latter point is excellent for families with children who may go down a different path, whether that be for military service, an unexpected scholarship, or if not all the funds are needed for one’s education expenses.

What are Considered Qualified 529 Expenses?

There’s a number of things that probably come to mind, but the extensive list is more than one might expect!

  • Tuition
  • Room & board
  • Utility & internet bills related to college housing
  • Computers & school-related technology
  • Books & supplies
  • Student loan payments

It’s important to mention that the qualified tuition expense is not limited to universities and community colleges. It also includes vocational and trade schools. Technical training for plumbers, electricians, HVAC, and other trades are covered so long as the education comes from an accredited institution. Please check with the financial aid offices of the institutions you are considering to clarify this

Think This is Something for You and Your Family?

If the 529 plan seems like a potential savings route for your family’s education goals, speak to a financial advisor or tax professional to learn more and come up with a plan tailored to your family’s specific needs and goals.

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