College Savings Season

College Planning
As we enter the month of May, the end of the school year is in sight. It’s a big time of year for students and parents alike. Whether your student is finishing kindergarten or graduating high school, it’s at this juncture when the future often starts to come into focus. No matter their age, many of these students will eventually be off to college someday, which begs the question: how on earth are they going to afford it?

As we all know by now, getting that college education is not cheap and doesn’t appear to be getting cheaper anytime soon. Parents are frequently looking for ways to help their kids out. Whether you’re hoping to pay for all of your children’s schooling, or just want to help out a bit, contributing to a 529 plan for your child can be a great option. Here’s why:

 

TAX-FREE GROWTH

529 plans, named after the IRS code that created them, offer an easy way to save while also providing tax advantages and various investment options for the money to grow. The primary benefit of 529 plans is that earnings grow tax free and will never be taxed if they are used for qualified college expenses. These expenses can be tuition, room and board, books, and various other fees.

 

INDIANA TAX CREDIT

There may be other advantages as well, depending on where you live. Different states have different 529 plan offerings, each with their own benefits for residents. Indiana’s CollegeChoice 529 plan is particularly good because, in addition to offering solid investment options, residents get a 20% tax credit for contributions up to $5,000.

Note that this is a tax credit (not a deduction) meaning that you get that full 20% to reduce what you owe in state taxes or added to your refund. If you would have owed the state $100, but contributed $5,000 to an Indiana 529 plan, you get a $1,000 credit, which would change your $100 debt to a $900 refund.

 

INVESTMENT OPTIONS

Again, these vary by state, but each plan has a menu of investment options that you can pick from. Often times, those choices include “target date” or “age-based” options that are low-cost and require little ongoing maintenance. They start by investing aggressively and get more conservative as the student approaches college age.

Investing these dollars can be extremely impactful over time. There are no guarantees, but over the course of an 18-year period from birth to college age, history tells us to expect some very nice growth. This is made even more powerful by the fact that this growth is never taxed.

 

HIGH LIMITS

For those who wish to save aggressively, another benefit is the high limits for contributions. Each parent can contribute up to $15,000 per student annually, free and clear of any tax ramifications. You can contribute even more if you are willing to file a gift tax return. We’d recommend a thorough tax and estate review before doing this, but the option is there.

There are also no income limits. Any person or family, regardless of how much they make, can put money into a 529 plan.

 

CONTROL

In most cases, the owner of a 529 plan is the student’s parent, grandparent, or other guardian. The owner always has control over the account, and determines when the money comes out and where it goes. The student is the beneficiary and will not have control over the account no matter how old they are. This is helpful for those worried about the student’s ability to responsibly spend the money.

 

FLEXIBILITY

529 plans can be used at all kinds of intuitions: undergraduate or graduate, public or private, trade schools, and so on. In some cases, they can even be used for K-12 expenses, to a certain degree.

Worried that your child will not attend any of these schools, or will get scholarships to cover most costs? 529 plans can be transferred to other beneficiaries as long as they stay within the same family. This means the money can go to other siblings, cousins, niece, nephews, etc.

One very cool possibility: in some situations when a child does not use all of their 529 plan funds, the parent/owner can elect to keep the money invested until the student has a family of their own, and change the beneficiary to the original student’s children, making this a very cool legacy gift from grandma and grandpa.

 

529 plans are often the best option for people who want to save for college, but not always. There are other strategies and account types that can be utilized. We recommend talking to a professional to make sure you choose the best option for you and your family.

Additionally, I would be remiss if I didn’t mention that saving for college should not necessarily be your number one priority. Too often we see parents stretch themselves thin putting their kids through school, and then they don’t have enough money to take care of themselves. While not always ideal, students can always take out loans for college. There is no such thing for retirement.

If you want to get started savings for your children’s school, or want a second opinion on what you already have in place, we would be happy to help. I recommend checking out CollegeChoiceDirect for more information on the Indiana plan, and SavingForCollege for general information on 529 plans and college savings.

About the Author: Joshua Bentz

Joshua Bentz, CFP®, Wealth Advisor, helps clients organize and simplify their financial lives by providing comprehensive, personal financial planning. As a Wealth Advisor, Josh provides comprehensive financial planning for clients. He enjoys getting to know individuals and families so he can give specific, meaningful advice. He believes in being a fiduciary and doing what is in the best interest of clients.