Happy 529 Day!
Saving for college as early as possible has never been more important as the costs associated with higher education continue to climb.
But many families are not aware of nor are they using 529 college savings plans to save and save more efficiently, especially if they are able to start early.
In this video, I talk about what 529 college savings plans are and how being better prepared to pay for college can, in fact, impact your own retirement plans. Enjoy!
Today is May 29th, in the college and investment world, it is known as 529 day. What is a 529? We’ll get right to that, but first, for many families with college-bound kids, there is an ongoing daily struggle between paying the bills of today, planning to help your kid pay for college, and as parents, saving for our own financial future (RETIREMENT MAYBE?).
I like to make the college-retirement connection because aside from your home, college and retirement are potentially two of the biggest financial goals you’ll have.
What is a 529 plan? The simple explanation is that its an account that can be used to save money for college or even k-12 education expenses and it has special tax treatment.
For families with college-bound kids like me, 529 plans can play a part in a successful plan to pay for college and ultimately help families, both PARENTS AND STUDENTS rely less on borrowing.
Let’s talk a little bit about 529 plans and some things you should think about.
1. So back to our question What is a 529 plan?
It is a special tax-preferred account to be used for qualified education expenses, either k-12 private school, college or other qualified educational expenses.
2. Where do you find these plans?
Most states offer 529 plans I THINK WYOMING IS THE ONLY ONE THAT DOESNT. In Washington state, we now have two plans, one is investment based, that’s called the DreamAhead plan or the other is a prepaid plan, called the GET or Guaranteed Education Tuition plan. I HAVE A COUPLE OF INTERVIEWS WITH THE WASHINGTON 529 PLANS ON MY PODCAST FINANCIAL SIDE OF LIFE FOUND ON MY WEBSITE AT AVEAFP.COM. (EP 23 and EP 5) Even though I live in Washington, I do not REPEAT, DO NOT have to use my state’s plan. For residents in other states who pay state income tax, there may be a state income tax DEDUCTION which makes using their state’s plan POTENTIALLY better for them. But ultimately you can use any plan that you want EITHER DIRECT TO the state or through an advisor.
3. Why would you want to have a 529 plan?
DEPENDING ON THE STATE YOU LIVE IN, THOSE WITH STATE income tax MAY GET A TAX BREAK,
b. But the key Tax benefit for EVERYONE is that the growth is tax-free, TAX FREE! when used on qualified education expenses.
c. Biggest reason is that having a separate account earmark this money for college. BY HAVING THIS ACCOUNT MEANS THAT YOU ARE THOUGHTFULLY AND INTENTIONALLY FUNDING THAT GOAL.
4. A LOT OF PEOPLE WONDER, What is the impact to getting financial Aid?
a. Any money saved by a parent for a student whether it is in a 529 plan or taxable account is counted BY the FAFSA in a relatively small way, at 5.64%. So for every $10,000 saved, your Expected Family Contribution is increased by $564. But this impact is small compared to parent income which has the biggest impact on your family’s EFC.
5. What happens if YOU don’t spend it on your student or they get a scholarship?
a. There are several options.
i. WAIT Student has up to ten years after his or her selected benefit use year to begin using the GET account.
ii. USE IT YOURSELF OR ANOTHER FAMILY MEMBER You can transfer funds in the account to another family member
iii. USE IT FOR OTHER TYPES OF TECHNICAL OR VOCATIONAL TRAINING
iv. LEGACY – change the student beneficiary on the entire account to another family member, even a future, unborn grandchild
v. You can request a refund as well, though you will likely be subject to taxes, penalties or fees.
6. Is the 529 plan the only way or THE BEST WAY to save money for college?
No, of course there is always more than one way to skin a cat.
BUT, Like a life jacket – the best WAY TO SAVE FOR COLLEGE is the one you actually use.
There are lots of ways to save, in Roth IRAs, regular taxable investment accounts, or quite frankly, not at all.
What I can say that each family’s situation is unique. There are costs and risks associated BOTH with doing and NOT doing something. So research some options, then make a decision on what works best for your family so that you start doing SOMETHING, ANYTHING, which I think is better than doing NOTHING if you intend to help pay for your kid’s college. And the earlier you start, the better!
As always, feel free to reach out to me at aveafp.com.
Angie founded Avea Financial Planning and is a fee-only advisor helping people retiring in 1-2 years, particularly PNNL employees, with tax-smart retirement planning, investments & fiduciary financial advice so they can be more confident and live life on their own terms.