College Savings: The 529 Plan

If you’re saving for a child or grandchild’s college education, brace yourself: The annual cost of a four-year degree for an on-campus student is over $25,000 per year for an in-state student and over $43,000 per year for an out-of-state student. Multiply those figures by four, and you might wonder if it’s worth it to send Junior to college.

Fortunately, there are ways to make your college savings work harder for you – like the 529 College Savings Plan.

What is the 529 Plan?

The hefty price tag of a college education means families need any help they can get when saving and investing for this important financial goal. We like to recommend our clients consider 529 College Savings Plans. These increasingly popular plans allow you to invest in professionally managed portfolios of stocks, bonds, and other securities.

Most plans let you invest in portfolios that are based on a child’s age. As the child ages, the portfolio’s mix of securities changes. Some plans also let you choose individual mutual funds and assemble your own portfolio. The best part? Earnings can accumulate without taxes, and distributions are currently tax-free if used to pay for qualified higher education expenses.2

Many plans have lifetime contribution limits of more than $200,000 – an important consideration given the pace at which college costs are rising. And you, as account owner, control withdrawals.

The Details

Another factor for some families is that with 529 Plans, there are no income limits for contributors. And if your designated beneficiary chooses not to attend college, you may be able to transfer the accumulated contributions to the beneficiary’s sibling, first cousin, or other qualified, college-bound family member – even yourself.

Contributions, which are treated as gifts for estate and gift tax purposes, qualify for the annual gift tax exclusion for each beneficiary. If you prefer, you may make a lump-sum contribution up to a certain amount in the first year of a five-year period without owing federal gift taxes. If you choose this approach, you can’t make additional tax-free contributions to the same beneficiary in the following four years.3

You may also wish to bring your children into the conversation to help teach the basics of investing and financial planning. For younger children, you could have them set aside a portion of their allowance each month to contribute toward their 529 Plan. Older children can log into the account with you and see the benefits of investing in real time.

Related: Are You Talking to Your Kids About Investing?

The main point? Begin investing as soon and as much as possible – and explore your options!

Learn More with Clarity

Our advisors can help answer questions about your 529 Plan. Click here to schedule a consultation with Clarity Wealth today.



^2^Nonqualified withdrawals are subject to regular income taxes and a 10% penalty. State tax rules vary.

^3^If the contributor dies before the end of the five-year period, the portion of the contribution allottable to the remaining years would be included in his/her gross estate.