The Strategic Approach to College Funding
Introduction
With college decision deadlines rapidly approaching, families are gearing up to start making their first payment to their child’s college or university of choice. For many families, this is a time of stress and uncertainty as they navigate a large change in their household’s cash flows. According to data from the National Center for Education Statistics, college prices have soared across all institution types. Full-time students paid $48,965 on average at a private nonprofit college in 2019-2020 compared to $21,035 at a public university. Though the trend has slowed since 2019, it is unclear if it is a short-term or long-term deceleration in price growth. One way that families can prepare for the increasing expenses of higher education is by investing in 529 plans.
What is a 529 Plan?
A 529 plan is a tax-advantaged state-sponsored program that allows families to pay for education expenses, such as college, graduate, or vocational school tuition and expenses. Earnings in a 529 plan grow tax-free, and withdrawals, including any earnings, are federal and possibly state income tax-free as long as it is used for qualified higher education expenses such as:
▪ Fees, books, and supplies.
▪ Equipment required for enrollment, such as a computer.
▪ Room and board, including off-campus rent.
▪ Up to $10,000 per year per beneficiary to assist in covering tuition expenses related to enrollment or attendance at an eligible elementary, secondary, public, private, or religious school.
▪ Payment of student loans up to a lifetime maximum of $10,000.
There are two types of 529 plans: a 529 Savings Plan and a 529 Prepaid Plan.
529 Savings Plan
Education savings plans allow the account holder to open an investment account for the beneficiary’s future qualified higher education expenses. The account holder may choose from a variety of investment options, such as mutual funds and ETFs. All education savings plans are sponsored by state governments.
Prepaid Tuition
Prepaid tuition plans allow the account holder to purchase units or credits for the beneficiary to use in the future at participating colleges and universities. These colleges and universities are typically public, in-state institutions that sponsor the plan. Prepaid tuition plans are not as flexible as education savings plans as they can only be used for tuition and mandatory fees at select schools. If the beneficiary chooses to go to a school that does not sponsor the prepaid tuition plan, they can still receive the money from the plan to help pay for college tuition and fees, but the amount is determined by the plan. Most prepaid plans are sponsored by state governments and have residency requirements for the account holder and/or the beneficiary.
Advantages
529 plans are not only attractive for their tax advantages, but they provide flexibility to the account owners, allowing them to maintain oversight of the account assets and determine the timing and amount of distributions. Parents, grandparents, beneficiaries, extended family, and friends can also contribute to a child’s 529 plan or establish their own 529 plan for the benefit of the child.
There are also gift and estate planning benefits. You may contribute up to $90,000 (or $180,000 per married couple) per beneficiary in a single year without eating into your lifetime gift-tax exclusion. Once you contribute the assets to the 529 plan, the assets are generally considered to be out of the account owner’s estate.
Summary
529 plans serve as an important and valuable tool for families aiming to navigate the financial demands of higher education. These plans offer tax advantages and the potential for long-term growth, easing the burden of rising tuition costs. However, given the complexity of financial planning and the nuances of investment decisions, it is advisable to consult a wealth management advisor. An experienced advisor can provide personalized guidance, helping families tailor their 529 plans to align with their specific goals, risk tolerance, and financial circumstances. By seeking professional advice, families can optimize their investment strategies, ensuring a well-informed approach to securing the educational future of their loved ones.
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