College Savings: Is a 529 Educational Savings Plan Right for Me?

July 25, 2016 9:37 am

Daniel R. Legault, CFP®

Senior Financial Advisor

There are many ways to save for your child or grandchild’s college education. I have found the 529 educational savings plan to be a great starting point for someone wanting to fund a future college expense.  Read on for some useful tips and considerations concerning these plans.

What is a 529 Educational Savings Plan?
The least interesting part is that the number “529” simply references the section of the IRS code that pertains to this savings vehicle; it was enacted in 1996. The most interesting part is that this plan allows tax benefits on the growth of funds within the plan to be used for educational purposes only. So you save today, funds grow tax deferred and are withdrawn tax free, as long as they are utilized for qualified educational expenses. As with most government created programs, there are many factors to consider as it pertains to your personal situation. This blog is designed to provide a quick review and considerations to get you started.

529 educational savings plans are sponsored through individual states, who partner with mutual fund companies that offer a line-up of investments. You are free to select any state’s program; you do not have to be a resident of that state. For example, a Rhode Island resident can choose the UTAH 529 educational savings plan (link). However, your home state may offer a tax incentive to purchase the program within that state. For example, the Rhode Island plan is called CollegeBound Saver (link), and utilizes mutual funds from Vanguard, Invesco and Blackrock. Rhode Island residents generally receive a tax deduction of $500 or $1000 if you are married and file a joint tax return.

Key Considerations

  1. Gain/ Loss: Like most investments there is a possibility of gain and a possibility of loss. This is no different. Most plans offer a line-up of mutual funds or a preset allocation based on the age of the child.
  2. Tax savings: While you do not contribute pre-tax money to these accounts, the account does grow tax deferred and investment gains are withdrawn tax-free assuming you spend the money on qualified educational expenses such as tuition, fees, books, room and board. That is probably the biggest advantage to these plans.
  3. Penalty: If the funds are not used for educational purposes, the earnings are subject to a 10% penalty and taxed. This penalty does not apply to your contributions, only the earnings.
  4. Control: As a parent you remain in control of the account, the child is the beneficiary. This means that the child does not have control to withdraw funds. You can choose to change the beneficiary to another child if the original beneficiary does not attend college.
  5. High Contributions: Lifetime contributions are very high, varying from $245,000 to $400,000.

 

What next?

So what plan should you choose? What is the impact on financial aid? Should grandparents start their own 529 plan or fund a current 529 plan set up by a parent? Are there gift tax consequences? Can I change plans once a plan is established? These questions and more can be answered through www.savingforcollege.com. Additionally, StrategicPoint has multiple blogs addressing this topic that you can access on our website. (link) As always, I am happy to answer any questions you may have. Your personal circumstances will determine the best course of action, and a qualified financial advisor will be able to help you decide which plan is best for you. Hopefully this post has provided you with a giant leap toward funding a loved one’s future college education.

 

Dan Legault, CFP® serves as Senior Financial Advisor at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at dlegault@strategicpoint.com.

 

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Dan’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.