Is a 529 the Best Way to Save for College?

For parents with aspirations of sending their children to college, the costs associated with doing so can be daunting. For decades, the price of higher education has risen at a rate close to three times that of the Consumer Price Index. And although the rate of increase recently has subsided to some degree, this expense continues to be among the most significant faced by parents. 

Let's consider the following statistics:

 
  • According to Trends in College Pricing 2017 produced by The College Board, a nonprofit organization serving students and schools, the average published tuition and fees for in-state students at public four-year colleges and universities for 2017–2018 are $20,770.
  • In addition, the study states that the average published tuition and fees at private four-year colleges and universities for 2017–2018 are $46,950.
 

There is no question that the pursuit of higher education will come at a substantial cost.  You may be searching for the best way to save for that moment when your child leaves home and the bills roll in. To celebrate National 529 Day, let's take a closer look at 529 plans and their effectiveness when it comes to saving for college.

What is a 529 plan anyway?

Excellent question and probably a great place to start! A 529 plan is a qualified tuition savings program listed in section 529 of the Internal Revenue Code. While these plans are governed by federal law, the 529 plan itself is sponsored by the individual state and managed by a mutual fund company that provides the underlying investment choices for the plan. If the state savings plan meets the federal requirements, the plan’s balance and the future distributions from the plan receive favorable tax treatment.

Income tax benefits

A 529 plan provides some very nice tax benefits, with the primary benefit found in the tax treatment of contributions, earnings, and distributions. Contributions to a 529 plan are typically invested in a mixture of stock and bond mutual funds. Similar to an IRA, the earnings on the contributions are tax deferred; however, unlike a traditional IRA, distributions from the 529 plan are tax free, as long as they are used to pay for qualified higher education expenses.

Qualified higher education expenses are defined as expenses incurred for the enrollment and attendance of a full- or part-time student at an eligible educational institution. Common qualifying expenses for both full- and part-time students include tuition, books, supplies, and associated fees.  For a detailed list of what is included, visit www.savingforcollege.com

The Tax Cuts and Jobs Act of 2017 includes an expansion of 529 savings plans that allows families to save for K−12 expenses as well as college expenses. 529 plans will be able to use qualified distributions of up to $10,000 per year, per student, for elementary and secondary school expenses.

The effect on financial aid

529 plans not only provide substantial income, gift, and estate tax savings, but they also often have minimal effects on financial aid. 529 plans owned by parents are considered parental assets; this means they are assessed at a rate of 5.64 percent when determining how much a family is expected to contribute to tuition costs. Plans owned by students are considered student assets; student assets are assessed at a much higher rate of 20 percent. Qualifying distributions from 529 plans also receive advantageous treatment when determining eligibility for the subsequent year of financial aid. 

A wise choice

When considering all of the options available to parents, a 529 plan offers the most beneficial means to save for college. Tax deferral on the growth of underlying investments, tax-free withdrawals for qualifying higher education expenses, the possibility of a state income tax deduction, the low impact on eligibility for financial aid, and the gift and estate tax benefits make a 529 plan an excellent vehicle for saving toward higher education goals.

If you'd like to discuss what makes the most sense for you, please don't hesitate to give us a call. 

 

The fees, expenses and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10% penalty. By investing in a plan outside of your state residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance and administrative/management fees and expenses.