Higher Education Savings: Giving it the Old College TrySubmitted by Mustard Seed Wealth Management on January 31st, 2020
Two particular sectors of the economy have seen significant increases in cost over the past few decades: healthcare and education. Many parents, who are looking at rising tuition costs, are wondering how best to save for their child’s education. I don’t think it’s right that you should extort money from the college, so a better option is found in section 529 of the IRS code, which allows for a great account that can set you up for success in saving for college and private school tuition. 529 Plans are available in all 50 states and have different tax implications depending on which state you live in.
The Arkansas plan that we normally suggest for clients is The Arkansas 529 Gift Plan- www.thegiftplan.com. In Arkansas, you are able to contribute up to $5,000 per tax-payer ($10,000 for married couples filing jointly) and deduct it on your Arkansas state income tax return. The overall contribution limits are very high, but for the $15,000 annual gift tax exclusion purposes, it is best to not give more than $75,000 (per donor) on year one and then allow the annual exclusion to be applied over the following four years. There are also overall aggregate limits on how much can be contributed to each account. In Arkansas you can contribute until all account balances for an individual beneficiary reaches $366,000.
There are multiple options for how you can invest the money. The easiest options for investment are the age-based options that automatically change the investment allocation as your child nears college age. You can choose a conservative, moderate, or aggressive profile. We normally recommend these funds since they are a “set it and forget it” option. The funds are managed by Vanguard, which is the largest mutual fund company in the world with some of the lowest possible fees.
529 accounts have many beneficial features for parents or those who own accounts that they set up for the future or current student. The account owner who sets up the account owns it and can control the money indefinitely. If you have multiple children and it turns out that one of your children doesn’t need the money, you can move the money to another child’s account. As mentioned above you may get a tax benefit at the state level depending on your state, and when you use the money for qualified education expenses, the money comes out of the account tax free, both principle and earnings. Be sure and understand what types of expenses are qualified. Tuition, books, private school prior to college, and some other specified expenses are qualified and can be paid from the account without taxation.
Many of our clients use 529 accounts to fund college savings for their children and grandchildren. The accounts are a great tool to save and to include other members of your family in the saving process. It’s a great opportunity for grandparents, friends, aunts and uncles to contribute to your child’s future success. One idea for saving is instead of getting grandparents a Christmas or birthday gift, make a contribution to your child’s 529 in their honor. Saving for college is tough, but when the goin’ gets tough… the tough get goin’! There are many benefits to these accounts but they aren’t for everyone. As always, discuss these accounts with a tax or financial planning professional before making a move to ensure success in your college savings goals!