By Justin Peek, CFP, AAMS
You probably won’t see it on your calendar, but May 29 (5/29) is 529 College Savings Day, or “529 Day” for short.
This day, named after the 529 plan, a popular college-savings vehicle, is designed to promote people’s awareness of the need to save and invest for the high costs of higher education. And that need has never been greater.Consider the following:
College prices keep moving up. For the 2016–2017 school year, the average cost (tuition, fees, room and board) was about $20,000 for in-state students at public universities and more than $45,000 for private schools, according to the College Board. These costs are likely to continue climbing.
Student debt is at record levels. Of the Class of 2016 graduates who received loans – about 70% of the total student population – the average individual debt was $37,172, a record high, according to a study cited by CBS News.
What can you do to help your children or grandchildren graduate from college without having to provide a big “IOU” in exchange for a diploma? In the spirit of 529 Day, you might want to consider investing in a 529 plan. It’s certainly not the only means of saving for college, but it does offer some attractive benefits.
For starters, contribution limits are quite high – you can accumulate more than $200,000 per beneficiary in many state plans. You can fund $14,000 per child per year and you can prefund up to five years of contributions to really maximize the time value of money in quality investments provided you forgo contributing those next five years. And you can typically invest in the 529 plan offered by any state, even if you don’t reside there. If you do invest in your own state’s plan, you may be eligible for state income tax incentives (not in CA fellow Carlsbadians!). Also, all withdrawals from 529 plans will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of the beneficiary you’ve named — typically, your child or grandchild. (Withdrawals for expenses other than qualified education expenditures may be subject to federal and state taxes and a 10% penalty on the earnings portion of the distribution.)
Furthermore, you have complete control of your 529 plan assets. You decide who will get the money and when he or she will get it. You can even change the beneficiary to another family member.
Keep in mind, though, that your 529 plan will be counted on the Free Application for Federal Student Aid (FAFSA), although schools typically only consider up to 5.6% of parental assets when calculating financial aid. And distributions from a parent-owned 529 account used for one year’s college expenses will not usually reduce next year’s financial aid eligibility. (For more information on how a 529 plan might affect your child’s financial assistance, you may want to consult with a college’s financial aid office.)
Give some thought to a 529 plan – it might be part of the solution for helping your children earn a relatively debt-free degree.
For more information on 529 plans, late-stage college planning or how to cut college costs for high income earners (who receive little or no financial aid) contact Justin Peek, CFP® at (760) 635-1097 or [email protected]