Vail Daily column: A 529 plan can help with those college bills
We’re at the end of another school year. If you have younger kids, then you might be thinking about summer camps and other activities. But in the not-too-distant future, your children will be facing a bigger transition as they head off to college. Will you be financially prepared for the arrival of that big day?
A college education is a good investment — college graduates earn, on average, $1 million more throughout their lifetimes than high school graduates, according to a study by Georgetown University — but a bachelor’s degree doesn’t come cheap. For the most recent school year, the average expense — including tuition, fees, room and board — was $19,548 at a public four-year school and $43,921 at a four-year private school, according to the College Board. And by the time your children are ready for college, these costs may be considerably higher, because inflation is alive and well in the higher education arena.
Your children may be eligible for some types of financial aid and scholarships. But even so, you may want to consider some college-savings vehicles — and one of the most popular is a 529 plan.
A 529 plan offers a variety of benefits, including the following:
• High contribution limits: A 529 plan won’t limit your contributions based on your income. In all likelihood, you can contribute as much as you want to a 529 plan, as many states have contribution limits of $300,000 and up. And you can give up to $14,000 ($28,000 for a married couple filing jointly) per year, per child, without incurring any gift taxes.
• Tax advantages: Your earnings can accumulate without charging you taxes, provided they are used for qualified higher education expenses. Plan distributions that are not used for qualified expenses may be subject to federal and state income tax, and a 10 percent IRS penalty on the earnings. Furthermore, your 529 plan contributions may be eligible for a state tax deduction or credit if you participate in your own state’s plan. But 529 plans vary, so it is a good idea to check with your tax advisor regarding deductibility.
• Freedom to invest in any state’s plan: You can invest in a 529 plan from any state — but that doesn’t mean your child has to go to school there. You could live in one state, invest in a second state’s plan and send your student to school in a third state, if you choose.
• Money can be used for any program: Upon graduating high school, not all kids are interested in, or prepared for, a traditional four-year college. But you can use your 529 plan to help pay for qualified expenses at a variety of educational institutions, including two-year community colleges and trade schools.
Of course, a 529 plan does have considerations you will need to think about before opening an account. For example, your 529 plan assets can affect your child’s needs-based financial aid, but it might not doom it. As long as the 529 assets are under your control, they typically will be assessed at a maximum rate of 5.64 percent in determining your family’s expected contribution under the federal financial aid formula, as opposed to the usual 20 percent rate for assets held in the student’s name. In any case, though, a 529 plan is worth considering. But don’t wait too long — as you well know, your kids seem to grow up in the blink of an eye.
This article was written by Edward Jones for use by your local Edward Jones financial adviser. Edward Jones and its associates and financial advisers do not provide tax or legal advice. Chuck Smallwood, Bret Hooper, Tina DeWitt, Charlie Wick, Chris Murray, Kevin Brubeck and Dolly Schaub are financial advisers with Edward Jones Investments. They can be reached in Edwards at 970-926-1728 and in Eagle at 970-328-4959 and 970-328-0361.
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