The first day of school is right around the corner and you can’t walk into a store without seeing back to school displays and sales. But while you’re checking off that school supply list and making sure your kids’ fall clothes still fit them, don’t forget to think long-term. No matter how old your child is now, their college days will arrive sooner than you think. So while you are in the school state-of-mind, start thinking about how you will pay for their future educational expenses.
Why Do I Need To Save For College?
With the tuition trends these days, college won’t pay for itself. For the 2016-17 school year, the average cost of tuition and fees is sitting at $33,480 for a private university, $9,650 for state residents at public universities, and $24,930 for out-of-state residents attending public universities. (1) With these kinds of numbers that keep increasing, a part-time or summer job just isn’t enough to pay the tuition bill. Saving early and taking advantage of compound interest could save your financial life down the road.
Secondly, a college education is a significant part of your child’s future financial success. A 2014 Pew Research Center study among Millennials shows that those with a Bachelor’s degree earned on average $45,500, while those with only a high school diploma earned a mere $28,000. If someone only had a high school diploma, they were almost four times more likely to be living in poverty than a college graduate (5.8% vs. 21.8%) and more than three times more likely to be unemployed (3.8% vs. 12.2%). (2) With these two facts in mind, let’s look at the 6 important benefits of using a 529 plan to save for college.
The Benefits Of A 529 Account
A 529 plan is a tax-advantaged savings plan sponsored by individual states. 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 and college savings plans have no age or income restrictions and allow you save up to $300,000 per child in many state programs and then use it, tax-free, for qualified education expenses. Here are some of the benefits a 529 plan offers:
1. Tax-Free Earnings
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.
2. State Tax Deductions
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, but taxpayers in Maryland may deduct $2,500 per account per beneficiary.
3. Plan Flexibility
You do not have to contribute to the plan in the state you live in. 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.
4. Recent Changes
529 plans received a gift at year-end. With the newly passed tax law at the end of 2017, 529 account holders can now use up to $10,000 annually on educational expenses prior to college. This includes private elementary and high school as well as tutoring expenses.
5. Anyone Can Contribute
Contributing to a 529 plan is not a privilege reserved for the parents of the beneficiary. Anyone can give towards the costs of higher education: grandparents, other family members, or friends.
6. Parental Control Of Funds
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.
Ready To Open A 529 Account?
If you think a 529 plan might be a good idea for you and your family, we can help. We can explain all your 529 plan options and help you decide which is best for your individual college planning needs.
If you already have a 529 plan set up, it is important that you have an experienced professional managing the investments in your account. The investment allocation should line up with the age of your child, and the investment risk should be gradually reduced as the child gets closer to college.
Let us help you prepare for the future. With our guidance and expertise, you can start saving for your child’s future today so you can ease the worries of tomorrow. To get started, book your free 30-minute introductory phone consultation today or contact our office at (323) 254-3072.
About Mason & Associates, Inc.
Mason & Associates, Inc. was founded in 1989, specializing in Life Planning for individuals, families and small businesses. Life Planning places a person’s core life values at the heart of the advice process and focuses on the human aspects of financial planning.
As a client, your personal story is key to our planning process. That is why we strive to build a close relationship that will encompass every aspect of your life. Together with our team of professionals, we guide you through the process of identifying what is important to you, your goals, your dreams. We then put into place a financial road map to set you on your way towards achieving your objectives.
Our responsibility does not end there. As you encounter bumps in the road, changes in goals or any other roadblocks, we are there to offer advice and guidance. We are there to celebrate your successes and cope with your challenges. We work alongside your other professionals such as your attorney and your CPA to be sure all of your legal and financial needs are aligned.