Saving for Future Educational Dreams

When I work with families, I have come to learn that saving for education is among the top priorities when discussing major financial goals. According to the National Center for Education Statistics, the average cost of undergraduate tuition, room, and board is $45,920 for private schools and $19,374 for public institutions per year. Without careful planning, those kinds of numbers make it difficult for families to fund these educational experiences. Just like when families begin saving for retirement, though, the high costs of education can be split off in small chunks over time if families start early. For example, a $250/month investment that achieves a 7% rate of return would result in almost $100,000 over 17 years. One way families can start to save this kind of money is through an education savings plan, specifically a 529, which typically offers the most flexibility for families to use the funds for future educational expenses.

A 529 plan is a state-sponsored education savings plan that allows money to grow tax-deferred, and as long as the money is used for educational purposes, it is 100% tax free. The tax advantage allows families’ money to grow faster. Investment choices are plentiful: The money can be used at any accredited school in the U.S or abroad, and depending on the state from which the 529 comes, the contributions may also be tax deductible. Here are some common questions my clients often ask me about 529 plans.

Q: What if my child doesn’t go to college or there are unused funds?

A: You can transfer the money to another beneficiary. Recent changes to the law also allow limited transfers to a Roth IRA in the name of the beneficiary.

Q: What can the money be spent on?

A: The money can be spent on tuition for schools from kindergarten and up, room, board, fees, or even books. Bonus: Vocational schools count, too!

Q: What if my child gets a scholarship?

A: Money can be withdrawn penalty free, but tax will be due on any capital gains.

Pro Tip: Funds received from the GI Bill are treated similar to a scholarship.

Q: What if the money is withdrawn for something other than education?

A: There is a 10% tax penalty plus tax due on any capital gains if the money is used for anything other than educational purposes.

Q: Who can participate in a 529 plan?

A: Almost anyone can participate. There are no income limits, and most plans have a very low minimum contribution.

Q: How much can you contribute?

A: Families can contribute up to $17,000 annually per donor per beneficiary (2023 limit). Before diving headfirst into a 529, however, be sure to plan to take care of your own savings and prioritize the basics first. Have an ample emergency fund, live within your budget, and save for your own retirement before deciding to invest in 529 plans.

By Jonathan Hutson, CFP

Originally found in Salute Magazine