Saving for College is Easier Than You Think

Can I afford college and a picture of a calculator and piggy bank

Many parents these days spend countless days and nights wondering how in the world their kids are going to pay for college. With tuition and expenses rising at an alarming rate, we often wonder what can we do to help shoulder some of the burden of these education cost.  In its most recent survey of college pricing, the College Board reports that a “moderate” college budget for an in-state public college for the 2015-2016 academic year averaged $24,061.  A moderate budget at a private college averaged $47,831.  These cost include Tuition, Fees, Housing and Meals (whether on campus or off campus), Books and Supplies, and Personal and Transportation expenses.

So today I am going to talk about what I have learned and what steps I have taken to start saving for my children’s future.   I opened a College Savings 529 plan.  I am going to explain what this is, how it works and why you should open one today.

What is a 529 Plan?

A 529 plan is a plan operated by a state, with tax advantages and other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.

Translation:

  1. A 529 plan can be used at any accredited post-secondary educational institution. An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.  I.E. University, Culinary, Fashion, Design, Technical, etc.  This type of plan is flexible because not every child is going to attend a 4-year university.
  2. Each state offers a 529 plan.  You don’t have to live in that state to take advantage of the 529 plan they offer. Your state’s 529 plan may offer incentives to win your business. But the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.
  3. You can set up a 529 plan and name anyone as a beneficiary — a relative, a friend, even yourself. There are no income restrictions on either you, as the contributor, or the beneficiary. There is also no limit to the number of plans you set up.

What is the main advantage of a typical 529 plan?

Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary (future student), such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible on your tax return

Translation:

  1. A 529 plan is an investment product.  As you make contributions to the 529, your funds are used to purchase investment products such as mutual funds and ETF’s selected by your investment representative.   A regular savings account is low risk but also a low return investment. With the 529 plan, as you are depositing funds into the account, those funds should grow.  The growth in these funds are exempt from capital gains tax as long as you use the money for the above named expenses.

Each 529 plan account has one designated beneficiary. What does that mean if I have more than one child?

A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. If you have more than one child it is not necessary to set up multiple 529 plans because you can change the beneficiary. This decision is totally discretionary and can be discussed with your investment representative as to the best set up for you and your family.  Ages of your children/beneficiaries is a critical factor in whether or not you set up multiple plans.

Can I change the beneficiary of a 529 plan I have set up?

Yes. There are no tax consequences if you change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.

Translation:

  1. If one of your children decides not to attend any type of post-secondary type of schooling and you have set up multiple 529 plans, you can roll those funds over to another child that will be incurring expenses for college.
  2. Also, if one of your children has a child of their own, you can roll those funds over to the new grandchild.  Again, these plans are very flexible. They truly are meant to help families with college expenses.

I have not set up a 529 plan for my child. Can I start one anytime during the year?

You can start one anytime. But the benefit of a 529 plan comes with the tax-free withdrawal of earnings that build up in the plan based on the contributions made. Like other types of savings accounts, earnings are usually a function of time. A 529 plan which is set up while the student is already enrolled in college or in other postsecondary education may not accrue enough earnings to be of immediate benefit.  However, that doesn’t mean that such a student wouldn’t benefit from a 529 plan as his or her postsecondary education continues.

Translation:

  1. Don’t wait.  Get started as soon as possible to give yourself and your 529 plan an adequate opportunity to grow and produce earnings over the next 18 years.  It’s never too late to get started.

Does my child have to attend school in Texas or the state that I have purchased my 529 plan in?

The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan. But to be sure, check with a plan before setting up an account.

What does it cost to set up a 529 plan?

That depends on your plan administrator but it is possible to find a plan that cost absolutely nothing to set up and administer. All you need is your initial deposit and then we suggest setting up a recurring transfer into your 529 plan on a bi-weekly or monthly schedule. You can also make one time deposits into the account at any time.  This is a great place to deposit birthday money from parents, grandparents, friends and other family.

The 2012 College Savings Indicator survey by Fidelity Investments reported that parents plan to save only 57 percent of their children’s future college costs, but that savings will cover only 30 percent of actual costs.  The use of tax-advantaged savings vehicles, like the 529 plan, is a great way to give your child the benefit of a higher education and lower student loan debt.

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