Saving for college is one of the primary financial concerns of most Gen X parents, and more and more often grandparents are getting involved in college savings for their grandchildren. With the cost of college constantly climbing, it’s no wonder that funding continuing education for future generations is becoming an all-hands-on-deck endeavor. The average cost of college in the United States is $11,171 a year for an in-state public college. Private universities cost an average of $41,411 a year.
There are several different ways to save for college. Of course, families can save cash, but it’s usually more efficient to save with an investment account to grow your college savings over time. One common method people use to save is the 529 Plan.
A 529 Plan is a savings account that offers tax benefits to the account’s beneficiary. These accounts can be used to save for qualified college expenses (including tuition, room, board, books, supplies, and more), and K-12 tuition expenses. The funds in your plan can be invested according to your timeline before the beneficiary goes to college to increase their value.
They can be funded by anyone, but most commonly are funded by the beneficiary’s parents. Of course, if the beneficiary chooses to not attend college, the account can either be transferred to them at a certain age or the funds can be transferred to a different beneficiary who is considering attending college.
529 Plans have numerous financial benefits. Contributions themselves aren’t tax deductible, but distributions from the account are taken tax-free regardless of the growth experienced through investing the funds.
Additionally, if your children or grandchildren attend a private K-12 school, up to $10,000 per year can be withdrawn from the account tax-free for qualifying expenses. Additionally, some states offer tax breaks to residents who set up a state 529 Plan. These tax breaks are usually a full or partial tax deduction credit for any contributions made. Contributions to 529 Plans are also exempt from gift taxes.
It’s important to note that if your 529 Plan beneficiary doesn’t go to college or use all of the account, withdrawals will be subject to a 10% penalty fee and income taxes on the earnings. Additionally, if your beneficiary receives a scholarship and doesn’t require the funds saved, no penalty is assessed but the earnings on funds are subject to income tax. So, it pays to switch beneficiaries if your original beneficiary won’t be using the money set aside!
Most states have their own 529 Plan, but you don’t have to choose the plan that’s created by your state of residence. There are a few important things to consider when setting up your plan:
You may also decide that a 529 Plan isn’t for you. If this is the case, know that there are several other college funding options available. For example, some states offer prepaid tuition programs where you “buy” tuition to local universities or community colleges in advance. These programs usually outline what you’d owe monthly to prepay tuition, at a discounted rate.
Navigating college savings can be a challenge! We’d love to answer any questions you may have. Feel free to reach out by contacting us here.
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"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.