For the sandwich generation, college planning concerns are plentiful. If you’re planning to help pay for college for your child(ren) here are five important tips you should know about 529 college savings plans:
- College tuition is exorbitant so investing in a vehicle optimized for growth and tax efficiency is imperative; the 529 is a good option. With post-tax contributions, the 529 plan enjoys tax-free growth much like the popular Roth IRA. Why not use your Roth IRA then? Because you’re limited in your Roth IRA contributions to $5,500 ($6,500 if over age 50) and should be maximizing this for retirement purposes. Of course, there are caveats but no other plan offers you the ability to grow money without paying tax on any investment gains.
- Saving money on your state income taxes today is another side benefit of 529 plans for many investors. To be clear, this is a state-by-state benefit that not everyone gets but if your state is one that allows for tax-deductions for 529 contributions, you’re even further incented to use this awesome plan.
- High contribution limits on 529 plans make it possible for you to fund college through these plans, even if you started late. With 529 plans, you are able to contribute up to the annual gifting limit of $14,000 in 2017 ($28,000 for a couple) and 529 rules allow you to make accelerated contributions of 5 years on a one-time basis. That should help most people to get caught-up if they have the means to take advantage.
- Broad use rules allow for the money to come out of the 529 plan for a lot of different expenses. While airfare to and from school is not included, you can use the money for college-related fees, books, computers, supplies, and of course tuition itself. So long as the student is enrolled on at least a half-time basis, a limited amount of the money could also be used for room and board.
- 529 plans aren’t just for parents of young children. If you, your spouse or your adult child is currently enrolled in school, a 529 plan might make a lot of sense (cents too). If your state allows for a tax deduction for the contributions, put money into your state’s 529 plan before you pay tuition. By filtering tuition through the 529 account, you’ll save yourself state taxes on that money.
Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal or financial advisor for more information prior to investing.