It could be your proudest moment—finding out your child or grandchild has been accepted to the college of his or her “dreams.” What could be better than knowing your financial preparedness will help ensure this dream is realized?
Far too often, this is not the case. The child is accepted, only to learn that funding isn’t in place to help him or her achieve those higher education goals. The ongoing needs of quickly growing children often tap extra cash that could be saved to finance future aspirations. However, if you anticipate assisting with college expenses, thoughtful planning is a must, as costs only continue to rise. The College Board® reported an average tuition increase of 3.7% at private colleges and 2.9% at public universities for 2014-2015. The projected costs for tuition and fees at a four-year institution in 2033 range from around $95,000 at a public in-state university to upwards of $323,000 at a private college.
The good news is: families with a desire to save for future college expenses have more options before them now, than in the past. The Section 529 college savings program, with many flexible options, is among them. Contributions to a 529 plan are not tax-deductible; however, there are other tax advantages to these plans, and earnings are not subject to federal tax when used for eligible college expenses. The proceeds can be combined with other federal financial aid and scholarships, and do not preclude an eligible taxpayer from taking education credits on their Forms 1040 for the year in which tuition and fee expenses are incurred.
You are not required to report contributions to a 529 plan on your federal tax return. There is no reporting document generated until a withdrawal is made from the account. Another benefit of a 529 plan is that everyone is eligible—there are no income, age, or annual contribution limit requirements. (There can be gift tax limits for individual contributions.) You could open a plan to benefit your child or grandchild, other family members, friends, or even yourself. There are lifetime contribution limits, but they are very generous ($235K-$500K). According to Savingforcollege.com, “…[t]he full value of your account can be used at any accredited college or university in the country….” Even the popular pre-paid tuition plans can usually be transferred from one school to another and often can be transferred from in-state to out-of-state schools.
For many reasons, grandparents will enjoy the advantages a Section 529 plan offers. Other traditional savings accounts, bonds, and investment plans don’t carry the same benefits as the 529 plan, which is tailored specifically for higher education needs. One of the more appealing features is you maintain control of the funds, and they are easily accessible if unexpected expenses arise. As the owner, you are the only one who can make withdrawals. You can possibly reduce estate tax exposure and advance your grandchildren’s educational dreams at the same time. If there are multiple grandchildren, it is easy to disperse funds and change beneficiaries according to a particular grandchild’s need.
As with any investment plan, there are some limitations dependent upon your individual circumstances, so take a moment to speak with your tax advisor concerning the implications of setting up a 529 or other college savings plan for your children or grandchildren. Remember, whichever savings mechanism best suits your situation, don’t delay in making plans to finance a child’s college education while he or she is young.
If you have questions about college savings plans or tax planning in general, or would like to request a speaker on these topics for your organization or event, contact one of our PYA executives below at (800) 270-9629.