Key Takeaways
- The cost of a college education is going up about 5% every year.
- Every state has 529 college savings plans, which are a great way to make paying for college a bit more manageable.
- A big advantage of these plans is that they are both tax-deferred and tax-free.
You may or may not have heard of 529 college savings plans, but if paying for a college education is in your future, they’re something you’re going to want to learn about. These plans are a code section that came out in the late ‘90s and they help you save for college on a tax-advantaged basis.
There are two types of 529 plans: prepaid tuition plans and education savings plans, and they’re sponsored state-by-state. Every state puts their own plans together and they select financial services institutions to run those plans.
This is similar to the way 401(k)s operate, in that you have accounts you can choose from, whether they be growth mutual funds, value funds, international positions, or age-weighted, and so on. They are the same kind of choices, but the state sponsors it, so if you want to save for college for your children or your grandchildren, you would select the state’s plan you want to go with (you’re not limited to your home state).
A good resource is a site called savingforcollege.com, which has been around for many years. This site provides a lot of great information about 529s and is a good starting point if you’re not familiar with the plans.
So, what are the benefits to doing a 529 funding? Well, for certain states, you get a deduction at the state level on your income taxes for anything that you contribute to the 529. This might be an advantage when it comes to your taxes – if your state has a 5% state tax, you might save a little money.
As mentioned, there are two types of 529 plans: prepaid tuition and education savings plans. What are some points to consider when choosing one over the other?
Prepaid tuition plans at the state level allow you to lock in the cost for tuition (not room and board) based on what it costs today. Given that college expenses have been increasing 5% or more every year, this could be a good option. However, this is only for in-state school tuition and you can’t choose another state’s school, nor a private school with this plan. It’s less expensive, but it’s very limited and not very flexible.
With the education savings plan, you can attend any college, in any state, as long as the funds are used for qualified education expenses. There’s a limit of $15,000 that you can put into the plan – this is the annual gift tax exclusion, per person gifting. This means that if you and your spouse want to contribute to your child’s 529 plan, you can contribute up to $30,000 per year. This annual amount includes non-529 gifts, though, so take into consideration any other gifts when making contributions. There is a one-time exception as well, where you can put in up to five years’ worth of contributions.
So, how much to fund? Well, private schools cost around $60,000 to $70,000 per year right now. State schools are around $15,000 to $35,000 per year. So perhaps you fund somewhere in between that, giving consideration to the fact that these costs are increasing every year. You’ll also want to discuss whether you want to fund the entire cost for your child/grandchild, or just a portion of it.
The key thing to know is that there are some real tax benefits to 529 plans, and they create an opportunity to save for college and can help alleviate a large amount of student debt. If you have a child or grandchild going to college one day, make sure to check out these plans. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here is one of Gary’s previous posts that you might enjoy:
When Funding Your Child’s Education, Let’s Not Repeat History
