Saving for College . . . I’m Right There with You!
The years are flying by, and with three children all within 7 years of a college education, you know that tuition, books, and room and board expenses are on my mind! Tuitions have skyrocketed over the years, so if you have youngsters, I encourage you to start thinking about saving for college sooner rather than later. That being said, let’s talk about the most popular, tax- advantaged way to save for higher education – the 529 Plan.
Not a Taxing Way to Save. The 529 Plan is a great way to put money aside. You can make a lump sum deposit, or save on a regular basis with automatic withdrawals once or twice a month. While your money goes into this Plan after you pay taxes, the earnings compound without taxes ... and, when it’s time for your child to attend college, money comes out of the Plan tax free!
What Can It Be Used For? The money from a 529 can be used for tuition, fees, room and board (with limitations), books, even a computer. It cannot be used to defray travel expenses, insurance or entertainment. It is important to note here that for income tax purposes, you must keep all receipts and bills to account for the monies spent from the 529 account.
The Leftovers. If there are remaining funds left in the 529 after the student has completed his/her education, those funds can be taken out of the 529; however, you will be taxed on any earnings. Alternatively, you can change the beneficiary and use the money to help another family member, or leave the money in the account for (the possibility of) graduate school.
Always a Caveat. When considering financial aid, keep in mind that if a 529 Plan is owned by parents of a college student, up to 5.6% of the value is included in the Expected Family Contribution as a parental asset. If the 529 is owned by a grandparent, assets per se are not considered, but funds spent will be counted as income to the student and may very well affect financial aid eligibility. (Consider using grandma’s 529 in the final year of college, after financial aid has already been utilized or is unlikely to continue.)
There’s a lot to consider when planning for a college education, but a 529 Plan is a great place to start. To listen to my radio interview featuring Keith Bernhardt, V.P. of College Planning for Fidelity Investments, go to PlanStronger.com and click on the “radio” tab to access the show archives (air date 2/10/16).