I love summer time. The days are long, the garden is growing at full steam, and the sounds of youthful enterprises fill the air from nearby parks and municipal pools. Usually about mid-July I find myself reconciling the successes and failures of my gardening endeavors, with hopes of laying out a better plan for the next year.
For parents with school aged children, the waning days of summer bring planning for the next school year into focus and for many the opportunity to reflect on how seemingly fast time moves. At first the back to school lists are short: crayons, paper, a ruler, and a back pack to carry items in. Over time the expenses multiply as quickly as children grow, and before long college comes into focus and with it the reality that higher education is costing significantly more every year.
It is no secret that college tuition has increased over the last few decades. What is astounding is the 6-7 percent inflation pace at which the price of an education has grown. Worse yet, if the current trends continue parents hoping to cover or partially offset expenses are in for serious sticker shock if adequate steps aren’t taken. While it’s hard to predict if college tuition rates will continue to advance at the frenetic pace of the past few decades, it is a sober reminder that careful planning and saving now will help offset or even eliminate the need to take out a second mortgage.
Traditionally, the most common savings vehicles were the Coverdell Education Savings Accounts (ESA), US savings bonds, and Uniform Gift to Minor Accounts (UGMA/UTMA). These accounts provide parents a means for savings, but come with significant disadvantages such as limited savings capacity (ESA is capped at $2000.00 annually), ownership issues (UGMA/UTMA are the property of the child ), or limited growth potential (Savings bonds current yield is 0.50 percent).
Because of these concerns, and with the ever increasing college expenses, states began to offer new savings vehicles to better plan for future needs.
Enter the 529 plan
A 529 plan is a tax-advantaged saving and investment vehicle sponsored by a state, state agencies, or educational institutions and designed to encourage saving for future college costs. Annual non-deductible funding is capped at the gift tax exclusion level (currently $14,000 single/$28,000 married filing jointly), and total funding cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. This means a married couple could fund up to $140,000 at account inception, then repeat the process in the 6th year.
Further benefits of the 529 account include the ability to transfer the beneficiary to a qualified family member in the event of child number 1 earning a full ride scholarship, attending a lower cost school, or forgoing college all together. The account is owned by the parents (or grandparents) and not the child, helping to ensure the funds are directed towards their intended purpose and the investments grow tax free provided distributions are made for qualified post-secondary education expenses (Please see IRS publication 970 for information on the tax benefits for education: www.irs.gov/pub/irs-pdf/p970.pdf).
Not all accounts are created equal
Each state offers a 529 plan, but participants are not limited to their state of residence and some states such as Colorado offer tax deductions against state income taxes as incentives for funding the accounts.
As with any investment decision, parents need to carefully consider the fees associated with the underlying investments as well as the quality of choices available. Plans may be direct sold (meaning participants purchase the product directly through the plan) or broker sold (which may come with higher fees and expenses).
It’s never too late to start
Undoubtedly it is better to begin college savings during the first year of a child’s life, as demonstrated by the growth of monthly savings over 5, 10, 15, & 20 years. But what if your child is already well into their high school years? While it may be too late to fund 100% of future expenses, there is still time to set aside some funds in effort to defray the total outlay. Given college is a 4-5 year commitment, parents of sophomores, juniors and seniors will have 4-8 years of tax deferred growth potential before tuition bills are due. Secondly, if you live and pay income taxes in Colorado, the 529 plan again offers state income tax deductions for contributions without a time requirement before distribution. Which means you can fund a 529 plan, pay tuition the same year, and still get the offset.
Putting a child through school is a major investment in his or her future, and planning for their needs must be on the minds of every parent as they prepare for the coming year. Taking action now will help ensure your investment grows to his or her fullest potential.
For more information on saving for college please visit www.savingforcollege.com
For specific information regarding Colorado’s 529 savings plan please go to: www.collegeinvest.org
Jason M Brooks CFP®AIF® is the President of Indelible Wealth Group, LLC in Berthoud, a fee based Registered Investment Adviser firm in Colorado and California, serving clients from the Fort Collins area and across the country. He does not provide tax, accounting or legal advice. Please consult your own independent tax or legal advisor as to any tax, accounting or legal statements made herein.