What is a 529 College Savings Plan - and is it for You?
Let’s face facts. The costs of higher education represent a huge financial burden for many US families, even affluent ones in high-income brackets who have significant savings. And that’s true whether you consider public or private colleges and universities. The average tuition and fees at an in-state public college for the academic year 2018-2019 was $9,716, public out-of-state averaged $21,629, and the average sticker price for private institutions was $35,676*. Now, multiply that by 4 years!
And those are just the averages. The tuition/fees at some elite schools can run north of $50,000 per year. Of course, on top of those costs, families have to budget for room & board, textbooks and incidental spending money for their student(s).
Unfortunately, the costs have only been increasing significantly over the past decade. The 10-year historical rate of increase has been approximately 5 percent - substantially higher than the general inflation rate and also higher than average increases in personal incomes**. Put another way, if you were lucky enough to get a standard raise of 3% over the past couple of years, great...but that doesn’t keep pace with expected outflows if you’re supporting a child or grandchild in their pursuit of a degree.
What to do? Well, a valuable - in fact primary - arrow in your quiver should be a 529 college savings plan.
What is a 529 College Savings Plan?
Also known as a “qualified tuition program”, put simply, it’s a savings vehicle in which investment gains/earnings are 100% tax-free when that money is taken out to pay for college costs, also called qualified expenses [see ‘Broad Usage’ below]. 529 plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code - which is how the program got its name.
Many financial institutions offer 529 plans at very little cost. A few benefits:
- No capital gains. While the contributions that families can make into a 529 are after-tax, the appreciation and gains yielded by the funds and/or stocks that are part of the 529 are not taxed at all, unlike gains say earned in a regular brokerage account. In short, all of the money goes to work for you.
- Broad Usage. Qualified expenses are not limited to just tuition bills. They can be applied toward your student’s room and board, books and other educational materials, computers and related equipment - as long as the student is enrolled at least half-time.
- Convenient investment options. Most plans offer age-based portfolios that you can align with the student’s anticipated matriculation date. If you think your child or grandchild will go off to college in 2035, you can choose that year. The asset allocation of that portfolio then automatically adjusts over the life of the plan shifting away from riskier investments to more conservative ones as that child gets closer to college. Also offered are convenient automatic contributions to meet your situation. You can contribute regularly and directly from your checking account every month, in amounts as small as $25. This is great for families or individuals who prefer to “set it and forget it”.
- Ultimate flexibility.
- Anyone can contribute. Grandparents, other family members - in fact, anyone who is generous can help to put money into a 529 plan. In 2019, contributions up to $15,000 per individual are considered gifts for tax purposes.
- Some parents are uncertain about the future, perhaps those who are not entirely sure that one of their children will ultimately attend college. And that’s a natural question to ask. Especially if you intend to start saving early - which is highly recommended to allow for a time horizon for regular contributions and gains to rack up. But fear not. If it turns out Beth’s plan does not include higher education, the 529 plan savings can easily be transferred from one child to another without any tax consequences. In fact, the list of qualifying family member beneficiaries is very extensive. These would include:
- Foster children and adopted children
- 1st cousins
- Generally low fees. Savvy investors and savers know that bank or brokerage fees and costs can eat away at the overall investment returns. Fortunately, many 529 plans have low-cost options to choose from - of course it is wise to examine fees before deciding which plan to go with.
- Potential tax deduction. Many states offer a full or partial state income tax deduction as an incentive to contribute to a 529. Limits and eligibility vary from state to state.
Personally, I have a college sophomore who attends a university in Illinois, and on the advice of a co-worker about a decade ago I decided to open up a 529 plan for her when she was still in her toddler years. As the stock market has experienced good returns over the past decade, that appreciation, but also the inherent ZERO tax burden described above upon taking out the funds allowed my family to help defray what would have seemed like an even larger burden. I only wished I’d put more in over the years to allow for compounding.
Based on my experience, I’d recommend that any parent - regardless of the age of their child(ren) - look into a 529 plan. It’s never too late to start.
Plan for College Costs with Quicken
Thinking holistically, as with all accounts and investments, it’s incredibly helpful to see where a 529 plan fits in with your other various accounts - checking & savings accounts, retirement investments, credit cards, rent or mortgage, as well as other regularly occurring budget expenses. By using personal finance management software such as Quicken, you’re able to see all these accounts in one place, and understand where you’re money is going and how it’s working for you. No more logging into several different accounts and portals to see balances, inflows, and outflows. Once you connect your financial institutions, with Quicken, a 1-click update is all it requires to be in complete control of your financial life.
* US News World Report “Average Costs to Attend College in 2018-2019”
** Savingforcollege.com “Tutorial - The real cost of higher education”