This article was featured in Maine Women Magazine, June 2022
Higher education is one of the biggest expenses families face, and tuition costs are not expected to drop any time soon. Education after high school is so important to your child or grandchild’s future but putting money away for that big sticker price is no easy task. A working couple with young children in daycare may have little room in their budget for college savings, whereas retired grandparents might have the means to make substantial contributions. In either case, families saving for college should consider using a 529 plan to make it happen. Here are the top four reasons:
1. The opportunity to invest.
Saving cash in a bank account will produce very little growth. In fact, during this period of high inflation, most money sitting in the bank is losing purchasing power by the day. A 529 plan, however, offers investment options that range from conservative to aggressive, similar to a 401k. If you start saving while the child is very young, you can invest 529 contributions in a diversified portfolio of stock mutual funds which typically produce higher growth than cash or bonds over extended time periods (past performance does not guarantee future results). As the child grows and college nears, the 529 should become more conservative with a smaller and smaller stock allocation.
2. The tax advantage.
Using a simple example: if you put $100 in a 529 and 7 years later, it’s grown to $200, you can withdraw the full $200 tax free if it’s used for eligible expenses. Additionally, there’s no tax on growth along the way. The tax savings can be significant especially when the alternative is a taxable investment account. A 10% penalty and income tax applies on the growth if funds are not used for education.
3. Flexibility.
If penalties sound scary, you should remember that the definition of eligible expenses for 529 plans is very flexible. College tuition counts of course, but so do books, computers, and room & board. Trade school and community college expenses are generally eligible. Maine also allows you to use up to $10,000 from a 529 towards private K-12 education. Lastly, if your overachiever child gets a scholarship and won’t need their money (we can all dream, right?), you’re free to transfer their balance to another family member.
4. High contribution limits.
The annual gift tax exemption limit ($16,000 in 2022) is often cited as the “contribution limit,” however individuals can contribute five years’ worth of contributions ($80,000) in one year without needing to file a gift tax return.
And one bonus reason:
The opportunity to pass on valuable financial lessons. The parent or grandparent should discuss the college fund with the child every year, from age ten onwards. While family money conversations might feel awkward, the child will build financial knowledge and an appreciation for their family’s investment in their future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Past performance is no guarantee of future results.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.