College Tuition has been on the rise for many years and the costs don’t seem to be stabilizing anytime soon. Currently student loan borrowers owe about $1.6 trillion in federal and private loans. 65% of the Class of 2018 graduated with student debt and left with balances averaging roughly $29,200. Tough to let those numbers process, but it is the reality we are living in.
One way to ease the burden of having your children or grandchildren take out loans is to put money aside in a 529 college savings plan. A 529 plan is a tax-advantaged savings plan that is setup to save money for education. The idea of the plan is to direct funds to an investment account that grows tax-deferred and then any qualified education expenses can be withdrawn tax free. No taxes are due on the growth as long as you use the funds for qualified expenses. The difference between having the funds in an investment account outside of the 529 plan, is dividends, interest, and gains that are generated may result in taxes owed year-to-year and when funds are withdrawn. Keep in mind 529’s were put into place to save for college so any funds not used for qualified expenses may result in taxes and penalties.
Plans are sponsored by individual states but does not mean you have to use your state’s plan. Make sure to consult with an advisor to see which plan best suits your goals. In some states you even get a tax deduction for contributions. In our home state of Pennsylvania, savers receive a 3.07% state income tax deduction on all contributions into 529 plans. Account holders can contribute up to $15,000 per beneficiary for single filers and $30,000 per beneficiary for joint filers. Account holders remain in control of the account and can change beneficiaries at any time for any reason. For example, if you had a child receive a full scholarship and funds were not needed for his/her education, then you could transfer to another child.
One of the changes made in the new tax law is now 529’s can be used to help pay tuition expenses for K-12 private education. Check to make sure your state qualifies at savingforcollege.com.
If you have any questions on 529 plans or interested in getting started please feel free to reach out.