Many of the clients at Legacy approach us with concerns about helping their children or grandchildren save for college. They ask where they should start, how much should they save each year, and will they be able to save enough. Although saving for college can appear overwhelming, given the increasing cost of attending college, it is easier to get started than you might think.
We typically tell my clients that a 529 College Savings Plan is an excellent way for parents, and even grandparents, to save for a child’s education and combat the burden of student loans. (One advantage of a 529 plan is that anyone can open an account, so it’s a great estate planning tool. We have several clients who have even set up and contribute to a 529 plan for each grandchild.)
What is a 529 plan?
It is a state-sponsored, tax-advantaged way to invest significant assets toward the cost of higher education. There are two types of 529 plans: college savings plans and prepaid tuition plans. Prepaid plans are usually offered by a state or specific education institution and college savings plans are offered through a state or financial institution. Each state offers at least one 529 plan, with each plan having a program manager. Plans vary by state and differ on costs, program features and investment selection. You do not have to live in a state to participate in that state’s 529 plan. (However, you should check to see if your home state offers a plan that provides its taxpayers with state tax and other benefits only available if you invest in the home state plan.)
What are some advantages of a 529 plan?
- Anyone can open a 529 account, and friends and family can contribute to the account regardless of who opened it.
- There are no income limits for opening and funding a 529 account.
- The minimum contribution is typically very low, thus making it more affordable for families to get started.
- A 529 plan account has higher contribution limits than other types of education savings accounts, and gives the account owner control and flexibility not offered by most other types of college savings accounts.
- Accumulated earnings are tax-deferred.
- Withdrawals are exempt from federal income tax.
- Withdrawals are generally exempt from state tax for qualified higher education expenses, such as books, supplies, tuition, fees, room and board. (Recently, the Senate passed a bill to expand qualified expenses to include computer equipment, software and internet access.)
- Withdrawals from a 529 account can be used to pay for qualified educational expenses at any eligible U.S. postsecondary institution, as well as some colleges overseas. They can also be used for post high school education, such as trade or technical schools.
- If the beneficiary doesn’t use all the funds, or decides not to attend college, the account holder can change the beneficiary to another family member (i.e. sibling, parent).
- Lifetime contributions can total $300,000 or more (the amounts vary by state) per beneficiary.
- If you have the resources, you can jump-start your children’s college funds by depositing up to $65,000 in a single year (a couple can invest up to $130,000) without incurring a gift tax, as long as you make a special election and the contribution is your only gift to that beneficiary for five years. (The IRS views the gift as $13,000, or $26,000 for a couple, over five years).
Besides opening a savings plan, we also tell clients it’s important to remember to start early to provide adequate time for the funds to grow. Since the minimum contribution is typically low, and there are no income limits, just about anyone can open an account. At Legacy, we’d love to help you start saving for your children’s or grandchildren’s future. Contact us to see how we can help you secure your legacy.