Get your 529 plan started this year
Your kids and grandkids will thank you later
If you haven’t done so already, 2016 may be an opportune time to start saving for your children or grandchildren’s college education – while giving yourself a tax break in the process.
Last year, the average out-of-state tuition and fees for one year at a public four-year college or university increased 3.4 percent to $23,893. Tuition and fees for private nonprofit four-year institutions rose even higher at 3.6 percent over the same period to $32,405. By establishing a 529 plan, you’re not only taking advantage of a tax benefit but also giving a child or grandchild a helping hand toward alleviating the skyrocketing costs of higher education.
Here are some common questions asked about 529 plans:
What is a 529 plan?
- Named after Section 529 of the Internal Revenue Code, a 529 savings plan is a tax-advantaged savings plan designed to encourage saving for future college costs. The two types of 529 plans include a college savings plan and prepaid college tuition; both are generally sponsored by state agencies. Your cash is invested in investment options established by the plan. The total value is dependent on the performance of the investment options that you choose. The growth of these assets is tax-deferred and will be free from federal taxes if used to pay for qualified educational expenses. There are approximately 12 million 529 accounts currently in the U.S. with more than $248 billion invested and an average of $20,474 saved.
What are the advantages of a 529 plan compared with other college savings options?
- Two major 529 plan benefits include flexibility and income tax advantages. 529 plans are great when it comes to flexibility. Virtually anyone can contribute to the plan on behalf of the beneficiary including parents, grandparents and other extended family as well as friends. Additionally, investments can be used at a wide range of higher education institutions. Once the student is ready for college they can withdraw the funds to pay for qualified expenses at accredited colleges, universities and even technical schools. While contributions are not deductible, 529 plans are federal tax-free and will not be taxed when the student is ready to withdraw funds.
Does investing in a 529 plan affect scholarship opportunities?
- A 529 account owned by a parent for a dependent student is reported on the federal financial aid application (FAFSA) as a parental asset. While parental assets are assessed at a maximum 5.64 percent rate in determining the student's Expected Family Contribution (EFC), this is more favorable to student assets that are often counted at 20 percent.
How does a 529 savings plan affect financial aid?
- Colleges can establish their own formulas in distributing their own scholarship and grant funds. While many follow the federal formula when making awards based on financial need, some do not. Colleges may specifically inquire about 529 accounts set up for the student and make adjustments to your child's award. Again, it's best to contact the school beforehand and ask how 529 plans are handled under its institutional aid formula.
You may want to consider contributing to a 529 plan as a gift for birthdays and holidays. While this may not be your children’s or grandchildren’s favorite present, I promise that they will come to appreciate it come college time.