Paying for a child's education can be daunting-the current estimates for a four year private college average around $55,800. Assuming a college inflation rate of 6%, a parent may need $412,000 in 2031 to pay the college expenses for today's 9 year old, according to a recent article by Morgan Stanley.
With costs this high many students and parents are taking on significant student loan debt to pay for college. Parents and grandparents can help to minimize the pain by starting to save earlier and using 529 tax-advantaged education plans.
How A 529 Works
529 is named after a section of the Internal Revenue Code allowing an individual to set up a tax-advantaged vehicle to help save for future education expenses. Investment earnings grow tax-free, and withdrawals are exempt from Federal taxes if used toward qualified education expenses. Most States provide additional incentives as well.
529s aren't just for just for college anymore – added to the tuition eligibility are K-12, private and religious schools. Funds can be used for four and two year colleges, trade schools, graduate programs and some international institutions.
The plans are flexible. Unlike other education plans, if you open a 529, you are the account owner and continue to make all of the decisions. Suppose your child receives a scholarship or decides not to attend college. In that case, you can change to a different beneficiary within the family or use the funds on your qualified education expenses.
Parents worry that a 529 can hurt their child's eligibility for financial aid. Kathryn Flynn of Saving for College says the effect can be small and that in most instances, the tax-advantaged savings of the 529 more than offset the marginal negative impact on financial aid.
529 Contribution Limits
529 plans do not have annual contribution limits. However, contributions to plans are considered completed gifts for Federal gift tax purposes, and in 2022 up to $16,000, or $32,000 for couples filing jointly are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. 529s allow for an exceptional upfront contribution of up to $80,000 or $160,000 for married couples-the equivalent of five years of contributions-may be made without any gift tax consequences.
Start By Planning
Like most things, the earlier you start the better, and it's never too late to begin. A financial advisor can help choose the best plan for you, estimate future contributions, the most appropriate asset allocation, and withdrawal strategy. Coordinating with other family members, especially grandparents, can be beneficial from an estate and gifting perspective as well.
This content is developed from sources believed to be providing accurate information, and Twenty over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.