Plus: a lesson from Chapter 2 of 8 Things I Wish I Knew Before I Retired
Time to read: 6 Minutes
When we ask clients what their goals are, one commonality we often find is saving for college.
Whether they’re new parents looking to get an early start saving for their children’s college educations, retirees hoping to make regular contributions to their grandkids’ college funds, or at any stage in between, we’ve found that helping future generations pay for their educations is often a very high priority.
It’s no wonder why. With the astronomical cost of higher education expenses, from tuition to equipment, books, room and board, and more, continuing to rise, funding a college education, especially for more than one student, requires planning, even for high earners. Luckily, there is a tool designed specifically to help families plan for the expenses.
529s are designed specifically for educational savings, and are one of, if not the, most effective tools available. Keep reading to learn about what 529s are, why they’re so beneficial, and more.
What is a 529?
A 529, also commonly referred to as an educational savings plan or qualified tuition plan, is a tax-advantaged investment account designed to help families save and plan for education related expenses.
529s are government sponsored. All 50 states, as well as Washington DC, offer at least one type of sponsored education plan.
Who Can Make a 529?
Realistically, anybody is able to create a 529 plan for a beneficiary. However, we most commonly see the accounts created by parents, grandparents, or other relatives.
If several people want to contribute to save for a beneficiary’s education costs on a regular basis, they can do this by contributing to the same account (some even have a contribution link that can be sent to anybody who requests it), or by opening separate ones.
We primarily see multiple accounts opened when contributors live in different states and want to make sure they’re getting the best tax deductions possible.
Why are 529s a Good Way to Plan for Higher Education Costs?
Perhaps the biggest benefit of a 529 plan is that it not only allows money to grow tax deferred, but any withdrawals that are made to pay for qualified education expenses are tax-free. This means that, unlike other types of investment accounts, beneficiaries won’t have to pay taxes on their gains, as long as the money is used for its intended purpose.
Qualified expenses include tuition, books, supplies, equipment, room and board, and a variety of other fees. The cost of apprenticeship programs are also typically considered a qualified expense. Funds in 529s can also be used for student loan repayments or rolled over to a Roth IRA, with some limitations and restrictions.
Contributions to 529s often offer tax benefits as well. Depending on the state the contributor and account are in, there may be tax deductions or credits available, usually up to a certain dollar amount.
Why are 529s Important?
The cost of higher education has risen rapidly, and we don’t expect it to slow anytime soon. When you factor in books, room, and board in addition to tuition costs, a single year of college expenses can total over $60,000. Even for extraordinarily high earners, this can be a difficult to expense to front if it isn’t planned for – especially if multiple students are attending college simultaneously.
Not to mention, because 529s are investment accounts, money has the potential to grow much faster and to a larger extent than a savings account. While gains on both investments and savings accounts are taxed, withdrawals for educational expenses from a 529 are done so tax-free, making it a more effective tool than a traditional investment account or a savings account.
The key with using a 529 is the same as it is when planning for any other financial goal: starting early. The longer you invest your money, the more benefits you’ll receive from compounding interest. Even small contributions made consistently can grow quickly, allowing the account to accumulate exponentially over time.
Are There any Limitations with 529s?
There isn’t technically a limit on how much money can be contributed to a 529 account annually. However, contributions to 529s are considered gifts, which means the annual gift tax exclusion applies. This means that any amount contributed up to the annual tax exclusion is not subject to gift tax. However, contributions made in excess of the annual tax exclusion will count against the lifetime gift tax exemption.
This limit is per beneficiary, per contributor.
What if There is Extra Money in the 529?
Whether it’s from great planning, investments that happen to perform exceptionally well, several contributors, or scholarships contributing to educational costs, it’s possible that the funds in a 529 may actually exceed the amount needed to cover educational expenses.
In these situations, money can still be withdrawn from the account for non-educational expenses – but the gains for those withdrawals won’t be tax-free.
A Lesson from 8 Things I Wish I Knew Before I Retired.
In the second chapter of 8 Things I Wish I Knew Before I Retired, we share Paul’s story.
While Paul was an extraordinarily high earner, he developed a “Keeping Up with the Joneses” mentality. One of the many things that lapsed while he prioritized luxury items and experiences was regular contributions to his children’s college funds.
When his twin boys were getting ready to go to college, he realized just how big of a mistake that was. Even with his income, he realized that funding the expenses for two private school students (and, in a few years, adding his daughter’s) was something he just couldn’t do without taking on debt.
He realized that had he continued to make regular monthly contributions, he wouldn’t have needed to spend nearly as much at the time. In fact, he may have been able to cover their educational expenses entirely had he saved throughout their entire lives.
Download the book to read the full story and reach out to our team today to learn more about how 529 contributions fit into your financial plan.
Download the book here: https://thetranelfinancialgroup.com/complimentary-8-things-i-wish-i-knew-before-i-retired/
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Note: This content is for informational purposes only and should not be considered financial or tax advice. Please consult with your financial or tax advisor for guidance tailored to your specific situation.