One of the major concerns many parents have is how to pay for college. Some put it off until their children are visiting schools, while others start the moment their child is born. While it’s always best to save early, college savings is one place where being smart about where you save, and how much, can be crucial.
Many parents opt to open 529 College Savings Plans for their children. Named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996, 529 Plans are offered by every state and allow families and relatives to set aside money for education. What many people don’t realize is that they are not obligated to invest in a 529 Plan in the state in which they reside. Where you open your plan has nothing to do with where your child can choose to go to school, so it’s smart to investigate all options to find the best plan for your situation.
Note that 529 Plans cannot be jointly owned, so one parent or the other will own any given plan. It is important to name a successor owner on the plan (usually the non owner spouse or other relative) to make sure the funds do not become property of a minor child in the event a parent dies. There are financial aid reasons, and flexibility benefits to making sure this doesn’t happen.
529 Plan contributions are not tax deductible on federal income tax returns, but they may be tax deductible at the state level, depending where the contributor resides. Naturally, individual states have different rules. Maryland, for example, does not allow tax parity–you must use the Maryland 529 Plan to deduct the contribution, and it is limited to $2,500 annually per parent, per child.Other states allow you to receive a tax deduction for any plan. Be sure to consult with your tax advisor before making a choice.
It’s important not to over fund a 529 Plan you don’t want to have funds earmarked for school if they aren’t needed due to scholarships, grants, or even a child’s change of plans. One option is to put the most money into the oldest child’s account. Any unused funds can be transferred to siblings without penalty. While it is impossible to know at age three what a child’s future plans might be, it helps to have a game plan as early as possible in their lives.
While 529 Plans do allow the option to save as much or as little as is comfortable, there are other options to fund college that could make more sense. If it’s possible, consider saving enough money to cover the projected cost of four years at an in state school. If you can do this and your child chooses to stay in state, the cost is covered. If not, you only have to make up the difference between the state tuition and the school chosen.
If you are fortunate enough to have benevolent grandparents who want to help pay for school, there are two primary ways to do so. First, they can open and fund their own 529 Plans for their grandchildren. This has potential income tax and estate tax benefits, so consult your tax advisor. Secondly, they can write checks directly to colleges or universities, without limitation or gift tax implications. Thus, if they want to pay for school, let them write the tuition checks directly, rather than having them gift the money to their children or grandchildren.
In my opinion, one thing parents should not do is finance their children’s college costs at the expense of funding their own retirement. Unless you want to tell your children that you’ll be living with them someday when you run out of money, don’t do it! Planning for and funding retirement should be a priority over funding college for your children.
And last, don’t overspend on college. In the real world, with the possible exception of a top ten university, it won’t really matter what school they attend for their undergraduate education, so don’t go into debt for it. You’ll be teaching them an important lesson about value by saving, and spending, wisely.
Securities and Investment Advisory Services offered through NFP Securities, Inc., Member FINRA/SIPC. NFP Securities, Inc. is not affiliated with Brotman Financial Group or Parentesource.com. NFP Securities, Inc. does not provide tax or legal advice.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those help by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
There is no guarantee that the plan will grow to cover college expenses. In addition, depending upon the laws of your home state or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and also may wish to contact your home state or any other 29 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. You may also go to http://www.collegesavings.org for more information.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. Federal tax advice contained in this communication, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.