Investing for College
by Kaitlin Jones on Oct 9, 2019
A college education, while a worthy achievement, does not come cheaply. Forbes has estimated that the price of a college education has increased 8 times faster than wages, making financing a struggle for even upper middle-class families. When factoring in the cost of tuition along with room and board, books, and living expenses, a college education can quickly become an unaffordable luxury. Unfortunately, this increase in tuition has also led to an increase in student loans, as more potential college graduates turn to outside help in order to obtain their degree, with the erroneous assumption that they will be able to easily obtain a job with decent wages that will allow them to pay off their loans painlessly.
That’s why more families are turning to a 529 savings plan. A 529 plan offers families a way to save money for educational expenses with plan participants making contributions using state tax-deductible dollars. Funds in a 529 plan can be used for any educational related expense including tuition, room and board, books, as well as any educational related supplies such as computers and other equipment. Originally designed for college expenses, a change in the tax law passed in 2017 now allow 529 plans to be used to cover tuition and expenses for K-12 education, as well as tuition for both private and religious schools. 529 plan savings can also be used for vocational or trade schools as well.
There is no use it or lose it restriction on 529 plans, and unused plans can easily be transferred between relatives. For example, unused funds from one child may be transferred, penalty-free to another child or grandchild. Additionally, 529 plans can be used from any state, regardless of residence, and can pay for schools that are out-of-state. Although these provisions allow significant flexibility, generally tax benefits are only available by investing in a plan directly from a resident’s home state. Of Note: while 529 plans are available through investing companies, only state-run plans offer tax benefits!
If you are considering opening a 529 plan, it’s best to start as early as possible, giving the plan the maximum growth opportunity. As the saying goes, “Time is the Archimedes’ lever of investing.” For example, an investment earning 7% will double roughly every ten years! To maximize the effectiveness of these plans, investors can contribute $15,000 per year per contributor and frontload up to five years of contributions (meaning you can open an account and invest $75,000 per parent or grandparent, provided no additional contributions are made from that person for the next five years).
There are two types of 529 plans available; a savings plan and a prepaid tuition plan, with the savings plan working much like an IRA. Also keep in mind that prepaid tuition plans have a lower contribution limit, so your best bet will be to open a savings plan. And like any retirement plan or IRA, you’ll want to remain cognizant about where your money is invested, keeping in mind that you should probably move to more secure investment options as college approaches.
With the cost of tuition placing college out of the reach of many, opening a 529 plan for your children can prove to be beneficial.