As we come to the start of another school year, you may be thinking about how quickly your children or grandchildren are growing up. Whether you are lamenting or joyful, you realize college is right around the corner. Are you prepared?
My oldest son is entering his sophomore year at Wake Forest. Last year our eyes were truly opened as we paid for his first semester of college. College is really expensive! After doing a little digging, I learned that since I first entered college, many moons ago, the cost of attending a private college has increased by almost 7% per year. This is more than double the rate of inflation over the same period. It is hard to imagine that the cost of education will continue to increase at a similar rate. Indeed many predict we are about to witness a major transformation in higher education. Spiraling costs, reductions in government education funding, growing numbers of unemployed, debt‑burdened graduates and competition from online offerings are combining to make this a perfect storm for many colleges and universities. The next two decades will be interesting, to say the least!
But while we are certain to see changes in higher education over the coming years, two important things will not change. First, many of us plan to send our children or grandchildren to college or graduate school in the coming years. And second, it’s going to cost a lot of money. We think the best way to prepare for these future expenses is to fund a 529 plan.
Almost twenty years ago, in an effort to help Americans save for college, Congress passed legislation creating “Qualified Tuition Programs,” now commonly referred to as “529 plans.” These plans are established by individual states and must meet certain guidelines to qualify for the significant tax benefits they offer.
We believe there are five reasons a 529 plan might be attractive to you.
Earnings in 529 accounts can grow free from federal tax, and withdrawals for qualified higher education expenses are free from federal tax.
A number of states allow a deduction for (or a credit against) state taxes for all or part of a contribution to certain 529 plans. South Carolina and Virginia offer this while North Carolina no longer does.
You can contribute up to $14,000 ($28,000 for married couples) annually without gift‑tax consequences. Under a special election, you can contribute up to $70,000 ($140,000 for married couples) at one time by accelerating five years’ worth of contributions.
There are no income limits. You can contribute no matter how much you earn.
Though plans are administered by individual states, investors can choose from any plan, regardless of where they live.
Most states allow you to contribute until your account value reaches quite significant levels. For example, North Carolina permits contributions until your balance reaches $410,000.
Investors can use a 529 plan to pay qualified higher education expenses at any eligible educational institution, not just schools in the state sponsoring your plan.
You, the account owner, rather than the beneficiary, maintain control of account assets and determine the timing and amount of distributions.
You can change beneficiaries without penalty, provided the new beneficiary is a member of the previous beneficiary’s family.
Because contribution limits are quite high, parents and grandparents potentially have the opportunity to remove significant assets from their estates. This is especially true when you have multiple children or grandchildren and you are able to take advantage of the “accelerated gifting” mentioned above in the first bullet. Limits and exceptions apply.
A few things to note about 529 savings plans
If you withdraw money from your 529 college savings plan account for purposes other than higher education, your earnings will be subject to federal income tax and possibly a 10% federal tax penalty.
Your 529 college savings plan holdings could impact your beneficiary’s ability to qualify for grants and student loans.
We hope this brief summary of 529 Plans is helpful. Please let us know if you would like to discuss education funding for your children or grandchildren.
Before investing, carefully consider the plan’s investment objectives, risks, charges, and expenses. This information and more about the plan can be found in the plan’s disclosure statement which should be read carefully before investing. You should also consult with your tax advisor regarding your specific tax considerations. This is not a recommendation or offer to buy or sell securities.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.