Understanding 529 Plans

Although paying for a college education remains a financial challenge for many families, it can also yield the greatest rewards. While the earnings power of a college-educated person is generally greater than that of someone without a degree, spending four years at a private, four-year college, can create a bill resembling a mortgage.

But consider the price of not going to college. Individuals with higher education levels earn more, pay more taxes, and are more likely than others to be employed and to have job benefits such as retirement and health insurance. Adults with more education are also more likely to move up the socioeconomic ladder and less likely to rely on public assistance, according to Education Pays 2016, the latest report from the College Board’s Trends in Higher Education series. Consider the below from The College Board (www.collegeboard.com), an independent education association:

• Average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.4% before adjusting for inflation, rising from $9,420 in 2015-16 to $9,650 in 2016-17.
  
  
• The $1,930 increase in average grant aid from all sources and federal education tax credits for in-state students at public four-year institutions over the last decade covered 69% of the tuition and fee price increase over these years.
  
  
• Average published tuition and fees for full-time out-of-state students at public four-year colleges and universities increased 3.6% before adjusting for inflation, rising from $24,070 in 2015-16 to $24,930 in 2016-17.
  
  
• Average published tuition and fees at private nonprofit four-year institutions increased 3.6% before adjusting for inflation, rising from $32,330 in 2015-16 to $33,480 in 2016-17.
  
  
• The increase in average grant aid and tax benefits for full-time students at private nonprofit institutions was larger than the increase in tuition and fee prices between 2006-07 and 2016-17; between 2011-12 and 2016-17, the increase in grants and tax benefits per student covered 62% of the increase in average tuition and fees at these institutions.
  
  
• Besides tuition and fees, students have to pay for housing, food, books and supplies, additional college fees and other living expenses, such as transportation and entertainment and health care costs.

A 529 college-savings plan is a flexible and tax-advantaged way to save for qualified higher-education expenses such as tuition, fees, room and board, books, equipment and supplies at any accredited college, university, professional or technical school anywhere in the nation, as well as at some foreign schools. Vocational schools, those teaching trades such as culinary arts, technical skills, and art or music may also qualify. Many say it is the most evolved education-savings tool available as they offer more features for students and more benefits for parents (and grandparents) than traditional means of saving for college, such as prepaid tuition plans.

Every dollar in a 529 college-savings plan account grows tax-deferred until the money is withdrawn. Upon withdrawal, earnings are taxed at the child’s rate. Eligibility to contribute is not limited by income. Contributions can be as low as $50 per month and can be increased or terminated at the account owner’s discretion. You may also realize estate-planning benefits. While a 529 plan is generally a long-term investment, one can be opened for any person at any age, from newborn to adult, at any time. If the money is withdrawn and not used for qualified education expenses, a 10% federal tax penalty will apply and possibly a state penalty.

The payment levels are very flexible and the funds deposited grow on a tax-deferred basis. Prepaid tuition plans do not offer tax benefits, only help pay for tuition and limit one’s choice of schools.

Unlike many other savings choices, with a 529 plan, the donor is the “account owner” and retains control of the assets, even when the beneficiary turns 18 and funds in the plan must be used for higher education. Lots of parents and grandparents like this. Many earlier savings plans gave control of the account to the child upon turning 18.

There are many competing 529 plans on the market. While banks and insurance companies offer them, their selections are often very limited. Helping to fund a young person’s education may be one of the best investments a family can ever make. Choosing a financial advisor who’s already done his homework can help you find the right plan.