It's College Savings Day!

Planning for a debt-free future

With graduation season upon us, many Colorado high school graduates are looking toward the next step in their lives – attending college. While most high school seniors have committed to a school of their choosing, parents are now faced with the challenge of paying for it.

According to the Wall Street Journal, the class of 2015 is the most indebted ever, with an average of $35,000 in college-related debt.

May 29 (5/29) marks National College Savings Day, a day to bring awareness to the benefits of saving for college through 529 plans. Officially known as a Qualified Tuition Plan, this tax-advantaged investment vehicle is designed to help families pay for college and graduate school expenses when they are needed in the future.

What is a 529 College Savings Plan?

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, and both are generally sponsored by state agencies. Your cash is invested in investment options established by the plan. The total value will go up and down in conjunction with 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 12 million 529 accounts with over $248 billion invested with an average of $20,474 saved.

Benefits of 529 plans

529 plans have many potential benefits. Two of the major 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.

529 plans offer income tax advantages. 529 plans have tax-deferred growth as well as tax-free qualified withdrawals meaning withdrawals used to pay for qualified higher education expenses are federally tax-free.

You might be wondering who has and keeps control of the account, especially once the student turns 18. The way these plans work is that the control lies in the hands of the account owner. If the original beneficiary decides not to attend college, then the account owner can choose to change the beneficiary to another family member, gift the investment or liquidate the account. However, earnings on withdrawals that are not used for qualified educational expenses are subject to federal income taxes and a 10 percent federal penalty tax as well as state income taxes. Some plans may have age, residency or other restrictions and may charge a fee for beneficiary changes.

How much can you contribute?

Most state plans provide for high contribution limits. "This allows clients to add to their investment until the account value reaches the state-mandated maximum amount." Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home state 529 college savings plan.

When considering if a 529 college savings plan is right for you, make sure you don't lose sight of your other financial goals. Follow the lead of college-bound students. Do your research and consult with a financial advisor on what plan would be best for you.

A tax advisor should always be consulted when considering an investment in a 529 college savings so that you fully understand all of the associated tax benefits and implications.

To get more basic information on 529 Plans you can visit www.sec.gov/investor/pubs/intro529.htm in addition to consulting your financial advisor.

Categories: Finance