In 2015, nearly 75% of college freshmen said cost was an important factor in selecting a school, while more than 20% said they turned down their first choice because they could not afford to attend.1
If one of your financial priorities is helping your family cover escalating college costs, you may want to take advantage of a Section 529 savings plan. Planning ahead and setting aside money over time could help expand your student’s options when the time comes to make life-changing college decisions.
Investing in Knowledge
The funds invested in 529 accounts grow tax deferred, and withdrawals are tax-free when used to pay qualified higher-education expenses, including tuition, fees, room and board, books, and supplies. Congress recently added computers, printers, other peripherals, education-related software, and even Internet access to the list of qualified expenses for tax year 2015 and beyond.
Many 529 plans include age-based investment options that tend to become more conservative as the child approaches college age. Owners of 529 accounts are allowed to change the investment options for their existing plan contributions twice per calendar year.
A Family Effort
Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. There are no income restrictions for participation, so anyone who wants to provide financial support can contribute to a 529 plan opened on a student’s behalf. However, the 529 plan will not accept contributions after the beneficiary’s account balances reach a fairly high limit that varies by state.
You can contribute up to the normal annual gift tax exclusion ($14,000 in 2016) per student without triggering gift taxes. As an alternative, you could contribute five times the normal amount ($70,000) in a single year, as long as you don’t contribute any additional money for the next four years. Contributing to 529 plans also removes the assets from your taxable estate.
Grandparents who want to maintain control of 529 plan funds could open their own accounts for one or more grandchildren. There is no time limit on when the funds in a 529 plan must be used, and 529 plan assets can be transferred to another beneficiary in the same family (sibling, cousin, spouse, or even parent), if needed.
Families who expect to qualify for financial aid should be aware that 529 plan assets owned by grandparents are not considered in financial need calculations, unlike 529 accounts owned by students and parents. However, withdrawals from 529 plans owned by anyone other than the student or a parent count as student income for financial aid purposes and could have an impact on award money in later years.
When 529 plan withdrawals are not used for qualified higher-education expenses, earnings may be subject to ordinary federal and state income taxes and a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your tax advisor because they can vary significantly from state to state.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.
Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and investment company — can be obtained from your financial professional. You should read these materials carefully before investing.
1) Higher Education Research Institute, UCLA, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Consumers Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.