With school now out for most universities, who would want to talk about college planning? But I couldn’t pass up 5/29 without discussing 529 plans! All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.
A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred. One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.) A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions. Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.
To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative. If other family members would like to assist with college expenses, they too can open an account for the child. The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account. Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control. The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college. This provides flexibility so the money can still be utilized for educational expenses for another child or family member.
As with any financial planning decision, a 529 may or may not make sense for your personal situation. However, it is a great tool and resource to consider when taking on the challenge of saving for college. If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!
Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839