More families are saving with 529 accounts.
When saving for a child or grandchild’s college education, a tax-advantaged 529 plan is a popular way to save because of its many advantages. A 529 plan allows an investor to contribute after-tax dollars for qualified higher education expenses, such as tuition and fees or room and board. According to Sallie Mae’s survey on How America Saves for College 2018, around 40 percent of college-savings dollars are held in a dedicated college fund account. Among those types of accounts, a 529 college savings plan is the most popular choice. The report also found that the average amount saved in a 529 plan — $5,411 — has nearly doubled since 2016. For students and families interested in opening a 529 account, here are a few advantages of saving this way.
You can help curb student loan borrowing.
As the cost of higher education continues to soar, a 529 plan can help students and their families limit their reliance on loans to pay for college. Experts say plans, such as 529 savings accounts, are an important tool for reducing student debt. “Every dollar you save is about a dollar less you’ll have to borrow. Even if you didn’t get a return on investment, you’d still save money because saving money for college lets you avoid paying interest on the money you’d otherwise have to borrow,” says Mark Kantrowitz, a college financial aid expert and adviser to Savingforcollege.com.
Some states offer tax deductions.
While these distributions for qualified higher education expenses are tax-free on the federal level, tax treatments vary at the state level. More than 30 states, including the District of Columbia, offer state-level tax deductions or credits that can be claimed on a 529 contributor’s state tax return, according to a recent report published by the Brookings Institution. Ronald Ramsdell, founder and president of College Aid Consulting Services, says: “You may be able to take full advantage of a state tax deduction by enrolling just one of your children in the state’s 529 plan, giving you more freedom to search outside your state for a 529 plan for your other child. In other states, however, the full state tax benefit is obtained only when both of your children are enrolled in the in-state 529 plan.”
You can front-load contributions.
Five years’ worth of gifting — up to $70,000 for an individual or $140,000 per couple — can be front-loaded. “The big advantage here is that you reap the benefits of compounding,” says Alexander Lowry, a professor of finance at Gordon College in Massachusetts. Compounding can help an investment grow significantly over time. For example, if a 529 account is funded with $70,000, earns 4 percent annually in interest and the account holder contributes $50 a month, the balance will grow to nearly $160,000 after 18 years.
529 plans aren’t just for college.
“While savings can be used at most accredited two- and four-year colleges and universities, they can also be used at vocational schools and international schools,” says Roger Michaud, senior vice president for U.S. Advisory Services for Franklin Templeton Investments. With the recent passage of the new federal tax code by Congress last December, an account holder can now use up to $10,000 a year per beneficiary on K-12 tuition at an elementary or secondary public, private or religious school.
You can shop around.
College savers can choose from a wide range of 529 savings plans. Ramsdell recommends: “If you have a sense of which particular schools or types of schools your children are likely to attend, the choice of the institution may influence your selection of a 529 plan. This is especially true if your state offers a prepaid tuition plan, or if you are considering the private-college Independent 529 plan. A few of the 529 savings plans also offer extra benefits for students attending certain schools.”
You can transfer to another beneficiary.
Experts say you can change the 529 beneficiary to another qualifying family member without any tax consequences. “If savings are not used for the beneficiary or there is some left over, you can change the beneficiary to another member of your immediate or extended family, including siblings, grandchildren, nieces, nephews, cousins and more,” says Michaud.
Friends and families can contribute.
Parents can ask family members and friends to contribute to a 529 account in lieu of gifts at baby showers, birthdays and other special occasions, experts say. “A trend we are starting to see is younger clients opening up 529 accounts within weeks of their child’s birth. They ask their friends and family to contribute to the account instead of buying baby clothes and toys. This allow parents to take advantage of one of the best parts about investing: compounding of interest,” says Sean Flynn, a financial advisor and certified college planner at Essex Financial Services Inc., a wealth management firm.
There are penalty-free withdrawals.
While earnings on nonqualified withdrawals will incur federal income tax as well as a 10 percent penalty, there is a scholarship exception. If a student earns a scholarship, the equivalent amount can be withdrawn from a 529 plan tax-free and without a penalty. Experts says this provides a strong incentive for high school students to pursue award money for college.
529 accounts can be funded aggressively.
There isn’t a federal limit on the contributions that can be made to a 529 plan annually, experts say. But there are some state laws on minimum and maximum account balances. Wisconsin, for example, sets a maximum balance of $472,000 for all 529 accounts with the same beneficiary. Timothy Bickmore, director of financial planning at LBW Wealth Management says: “This can allow you to aggressively fund the account and receive the benefit of tax-deferred growth.”
There is no expiration date.
A 529 account can last for generations. “If your children do not exhaust the 529 accounts, you can leave any unused funds to your future grandkids. There is no expiration date on the use of the funds in a 529 account,” Flynn says.
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10 Advantages of Using a 529 to Pay for College originally appeared on usnews.com
