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Saving for College–529 Plans

With college costs soaring, what is the best way to save?  There are ways to save that can help ease the burden.


Saving for College–529 Plans

We all want what is best for our children.  At an early age, we teach them to eat the right foods, we place them in the best preschools, we encourage them in grade school and high school, and we cheer them on when they excel in extracurricular activities.

Put another way, we want our children to succeed in all aspects of life. 

As our kids wind their way through high school, most of us want them to attend college.  For some, it’s not just about going to a university but being accepted by and graduating from the “right one.”  Unlike when we were growing up, the pressure today is enormous. 

Pay to play

Are you familiar with the college admissions scandal? 

Succumbing to pressure to get their kids into the best universities, dozens of people were charged with circumventing established protocols and allegedly paid millions of dollars to secure entrance into elite universities for their children.

It’s not that these folks didn’t have the resources for tuition, textbooks, and living arrangements.  They did.  But they took the wrong path in the hopes of securing their child’s future.

Do we only want to teach integrity?  Or do we want to model it, too?

Exploding costs

The cost of college has soared.  In 1985, the annual tuition, fees, room and board rates charged for full-time undergraduate students at a four-year public university ran $3,859.  Thirty years later, the cost had ballooned to $19,189, according to the National Center for Education Statistics.  For private schools over the same period the cost has changed from $9,228 to $39,529. That’s a painful hit to the wallet.

The increase in costs is both astounding and sobering.  No wonder so many kids today graduate with both a degree and debt.  Of course, these are averages and costs will vary, but they paint an unsettling picture.   Fortunately, the bill isn’t due all at once.  There are vehicles that can help ease the burden and the magic of compounding can greatly ease the worries that come with saving for college.

The 529 college savings plan

One such vehicle is the 529 college savings plan.  A 529 plan is sponsored by the state or a state agency.  It allows someone to save for college.

Before we jump in, this is a high-level overview so if you have any questions about college savings or a 529 plan for your son or daughter, please feel free to reach out to your Curran Relationship Manager. We can help get you started and maximize the long-term benefits.

Benefits

  1. Pay for qualified educational expenses. One can use the savings for tuition, books, and education-related expenses at accredited universities, vocational-technical schools, and eligible foreign institutions. Funds accumulated in the plan may go to public, private, and religious schools.

  2. Tax advantages abound. While there is no deduction when cash is deposited into a 529 plan, any earnings are not subject to federal taxes and qualified withdrawals are exempt from taxes.

    Some states also offer full or partial deductions or credits for 529 contributions.

  3. Maintain control of the money. Unlike a Uniform Gifts to Minors Act (UGMA) account, in which the child will eventually take control of the accumulated funds at age 18, you remain in control of the plan. You make sure it goes toward its intended use.

  4. Set it and forget it.  Most 529 plans have a “set it and forget it” feature. You make the automated investment and an outside company manages your investment.

  5. Just about anyone can open a 529 plan. Contributions are not limited by the donor’s income. Earn $50,000 per year and you can set up a 529. Earn $50 million per year and you also qualify. Parents and grandparents can open an account for a child.

  6. There is no maximum annual contribution. Unlike with retirement accounts, the IRS doesn’t specify an annual maximum contribution. There are no age limits on contributions. Total contributions range from $235,000-$520,000 depending on the state. While most account owners won’t run afoul of the rules, there are some specifics we can discuss if you are considering a large, one-time contribution.

  7. 529 plans complement FAFSA.  A 529 plan helps maximize your ability to pay for college without jeopardizing financial aid. The 529 account is the parent’s asset, much as if you had saved the money under your own name.  However, with the 529, you’ll receive tax benefits that wouldn’t accrue if it were in a taxable account under the parent’s name.

Drawbacks

While 529s are an excellent vehicle, no plan is perfect.  So, let’s look at some potential pitfalls.

  1. The plan does not guarantee it will cover the full cost of a four-year college education. However, the earlier you get started, the better.  We can provide you with various scenarios such as contribution levels, compounding and inflation.

  2. Investment options may be limited. You are not in complete control of the plan. Therefore, it is important to invest in a plan that offers flexibility and low-cost funds.

    Do you want an age-based portfolio–one that begins with a more aggressive mixture of stocks versus bonds and gradually shifts to a more conservative mix as your child approaches age 18? Or will you choose a static asset allocation? If so, you’ll want to rebalance on a regular basis.

  3. You don’t need the savings in your 529 after all.  What if Johnny received a full ride to college? It’s a high-class problem, but still, alternatives must be considered.

    If money is used for noneducational purposes, you will likely incur taxes and a 10% penalty on the earnings.

    Possible options:
    • You can withdraw up to the amount of the scholarship without paying the 10% penalty. 
    • You can hold the money for graduate school. 
    • You could change the beneficiary to another qualifying family member without a tax or penalty. 
    • You may name yourself as the beneficiary if you intend to take classes. 
    • Or, you could consider keeping the account active for a grandchild.
  4. You must time your contributions and withdrawals carefully. Contributions must be made by December 31, though states that offer tax advantages may extend the deadline to April 15. And, make sure that any withdrawals coincide with qualified expenses in that year.

  5. Tax reform and K-12 Expenses.  In December of 2017, the Tax Cuts and Jobs Act of 2017 was signed into law.  A provision of the Act expanded the definition of a qualified higher education expenses for 529 plans to include up to $10,000 per year in tuition expenses at private, public and religious elementary and secondary schools (i.e. Kindergarten through 12th grade). However, not all states have conformed to the new law. Some states, including New York, still consider K-12 tuition a non-qualified 529 plan expense.

    We wrote an article "NYS 529 Plan Alert" on the K-12 Expense change in May, 2019:
    Please visit: https://www.curranllc.com/news-and-articles/education-planning-update-nys-529-alert for more information.

    So for example, in New York, distributions for K-12 expenses (or any other non-qualified expense) may result in recapture (or giving back) of the associated tax deduction on the NY tax return that was received at the time of contribution to the 529 Plan.  Additionally, there may also be NY state income taxes due on any gains attributed to the withdrawal that were earned in the 529 plan.

As mentioned earlier, this is a high-level overview.  It’s designed to shed light on one vehicle that can be used to save for education.  It’s also designed to ease what seems like a difficult burden for many–saving for college.

If you have questions about college savings or 529 plans please call our office.

Please check with your Curran Wealth relationship manager,
or contact Curran Wealth Management if you have any questions.
518.391.4200 •info@curranllc.com


The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. It is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  CIM, LLC does not provide tax or legal advice.  No one connected with CIM, LLC can ensure tax consequences of any transaction. The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.