Cypress Wealth Services
No matter where you look, you just can’t get away from the constant messages telling you to save for retirement. We frequently hear about the dire state of Americans’ savings accounts and the lack of retirement planning. There’s no doubt that your financial future needs to be a financial priority, but what about all those other important things to save for along the way, like your child’s college education?
It’s tempting to put off saving for college for a rainy day, but as anyone with kids knows, the days are long but the years are short. Before you know it, you’ll be planning college visits and filling out applications. In other words, it pays to plan ahead. Have you started saving for your child’s future education costs? If not, here are some important benefits to consider when thinking about paying for college with a 529 plan.
First, a note on rising tuition costs. If it’s been awhile since you went to college, you might be wondering why it’s so critical to save for your child’s education rather than just take care of it when the time comes. Well, tuition rates have increased at a faster pace than many other expenses over the past decade, and it doesn’t look like they will slow down anytime soon. In the past 10 years, tuition fees have risen an average of 1.8% a year for private schools and 1.9% for public colleges (*1).
And that’s just tuition, let alone room and board. With these kinds of numbers that keep increasing, a part-time or summer job just isn’t enough to pay the bills. Saving early and taking advantage of compound interest could save your financial life down the road. With that in mind, let’s discuss 6 important benefits of using a 529 plan to save for college.
A 529 plan is a state-sponsored education savings account that allows earnings to grow on a tax-deferred status. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you pay future tuition costs at today’s prices, which, considering skyrocketing college costs, can be enticing. On the other hand, college savings plans have no age or income restrictions and allow you to save anywhere from $235,000 to $529,000 per child (*2), and then use it, tax-free, for qualified education expenses. As an added benefit, you are not limited to using the plan offered by the state in which you live. Some states will give you a tax credit for using their plan, but in many cases, it’s worth it to shop around. Here’s what you can expect.
You do not have to pay taxes on earnings in a 529 as long as it is used for qualifying higher education costs (*3). There are no federal taxes due, and most states do not tax the earnings.
Most states also offer additional state tax deductions for contributions made to their own state’s plan. As 529 plans are state-sponsored, you would need to check with your particular state to see what specific tax advantages they offer. For example, California does not provide a deduction(*4), but taxpayers in Missouri may deduct up to $8,000 ($16,000 if you are married filing jointly) of our 529 plan contributions (*5).
You do not have to contribute to the plan in the state in which you live. Each state’s plan has different rules, limits, and perks. Every year, Morningstar releases their list of the best college savings plans to help you sift through the choices to find the plan that is the best fit for you.
Speaking of flexibility, you can also reassign a 529 account to a direct relative if the named beneficiary doesn’t use all of it.
As of 2017, 529 account holders can now use up to $10,000 annually on educational expenses prior to college. This includes tuition expenses at private, public, and religious K-12 schools. And thanks to the SECURE Act of 2019, you can also use your 529 savings to pay for apprenticeship fees, homeschooling, or up to $10,000 of qualified student loan repayments (including those for the 529 plan recipient’s siblings) (*6).
Contributing to a 529 plan is not a privilege reserved for the parents of the beneficiary. Anyone can give toward the costs of higher education: grandparents, other family members, or friends.
There is no need to worry about your teenager mishandling the funds because you, the parent, remain in control of the assets. The child that you are saving the money for is the named beneficiary of the account, but you are still the owner. They cannot bypass you to access the money.
Your child’s 529 account does factor into the Free Application for Federal Student Aid (FAFSA) calculation, but since the account is in the parent’s name, only 5.64% of the assets will count, meaning the impact on your child’s eligibility for financial aid is not devastating.
If you think a 529 plan might be a good idea for you and your family, Cypress Wealth Services is here to help. Our team can answer your college saving questions, explain your options, and help you determine the best path to your college funding goals. And if you already have a 529 plan set up, remember that it’s important to have an experienced professional managing the investments in your account to make sure you are still on track toward your goals.
Let us help you prepare for the future. To get started, contact one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, CA, Tustin, CA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.