When College Comes Knocking

When College Comes Knocking

January 18, 2022
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For many of us, college was an integral part of our lives and played a huge role in our ability to begin a career in our chosen field. Still many others received a degree from a college or university but did not end up on the industry that they had planned on. An increasing number of people have eschewed traditional secondary education altogether in favor of trade school, apprenticeships, and online learning programs. However, regardless of the path a student takes, one thing is certain: it won’t be cheap.

                At Provisio Retirement Partners, we often have parents or grandparents come to us with concerns about their children’s education. Namely, how are they, or their children, going to pay for it? With tuition continuing to skyrocket, particularly for private, 4-year colleges, this is an important question and one that should be answered long before the student begins sending in college applications. While every parent hopes their child gets a full-ride scholarship, odds are that they will need either to pay for at least part of their education out of pocket or take on student loans. Most parents do not have the funds to pay for school out of pocket and their children certainly don’t which means student loans as the most common choice for funding college education.

                However, what if there was another option? Perhaps, a way to put aside funds for after high school education early with a chance to grow and potential tax benefits? My friends, look no further than the 529 College Savings Plan! A 529 account has many benefits and can be a great way to accumulate funds for education. However, they are often misunderstood and sometimes underutilized. Here are 4 of the biggest things that you should know about 529 College Savings Plans!

 

  • You own the account

When you open a 529 account, you remain the owner of the account. This means that, even if your child is listed as the beneficiary, you have all rights to the account balance and have the full ability to make changes to the account at any time. This includes the ability to change the beneficiary of the account to another one of your children if your current beneficiary (usually your eldest) does not need the whole balance or doesn’t pursue further education after high school. You can even use the funds in the account for your own benefit however, this comes with both taxes as well as a 10% penalty from the IRS.

 

  • Not only for college

In 2017, the Tax Cuts and Jobs Act made it possible to use a 529 account to pay for K-12 private education. This is great news for those who send their children to private Christian schools or charter schools! Of course, the time you have to accumulate funds for that purpose is much shorter but this is a nice benefit regardless. Additionally, tax-free withdrawals for K-12 education are limited to $10,000 whereas withdrawals for college are unlimited. In addition, TCJA 2017 also made it possible to use 529 funds to pay for apprenticeship programs and trade schools. With the growing number of students going into the trades, this is another excellent benefit!

 

  • Tax-deferred growth

Much like a 401(k) or IRA, contributions to a 529 account grow tax deferred. This means that you will not incur any taxes on the account value until you make a non-qualified withdrawal. In the case of a 529, a non-qualified withdrawal refers to any withdrawals that are not made for qualified educational expenses. For example, you cannot take a tax free withdrawal from your 529 to pay for a new Mustang convertible! That said, if you use the account for its intended purpose (i.e. your children’s education) then your withdrawals will be tax-free! Of note is that both your contributions and investment gains are included in this benefit.

 

  • State tax deductions

Over 30 states offer a state income tax deduction or credit for 529 contributions, although most states require that you use the state sponsored plan (7 states have exempted that requirement). Some states limit how much you can deduct from your taxes while others will allow you to deduct the entire amount of your contribution. Some states also other anyone who contributes to the account (grandparents, loved ones, etc.) to take a deduction while others only allow a deduction for the account owner. It is important to know the laws specific to your state of residence. Check out this website for more information: https://www.collegesavings.org/plan-advantages/ .

 

 

Planning for college can be stressful but starting a 529 account early when your child is born and setting up a plan to make consistent contributions can help to ease the burden later in life. If you are not sure where to start or how much to contribute, reach out to us for a free, no-obligation consultation!

 

It has been awhile since I last did a song of the week. I regret this deeply. Without further ado, here is your song of the week! Enjoy!

Song

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.