By John C. Fales
The temptation to spend funds meant for another purpose can be high when your savings and investments are lumped together. When saving for education, having a “bucket” earmarked specifically for that purpose can get you started on funding educational needs and a 529 Plan may be a powerful tool on your savings journey.
A 529 Plan is an education savings account designed to help save for future college costs and other qualified educational expenses. Anyone (parent, grandparent, friend, self) can set up the Plan for the benefit of themselves or another beneficiary in order for contributions to grow tax-free and anyone can contribute to the Plan on the beneficiary’s behalf.
Many college graduates are finding the burden of student loans hard to repay and this may be setting them back in terms of saving for their future. In the 30 year period from 1982-2012, college tuition costs increased by over 700 percent and if jobs aren’t readily available for graduates, their debt could hinder their success. The 2016 Parents, Kids and Money survey found that 62% of kids expect their parents to pay for whatever college they want to attend. Would you be prepared to cover the costs of your child’s education? A 2013 study found that parents who save with a 529 Plan when their children are young pay half as much for their child’s education compared to families that utilize loans.
529 Plan Flexibility
The opportunity to change beneficiaries on these accounts helps the owner save early. Parents can set up a 529 Plan with themselves as a beneficiary before they have children and then update the beneficiary to a child’s name once they arrive. If you have a Plan set up for a beneficiary that doesn’t attend college, gets enough money to cover the expense or even if the original beneficiary does not use all the funds in their account, the beneficiary can be updated for the use of another person or rolled over to an account for a sibling.
For a child who receives a scholarship to cover tuition, they can take a distribution from the Plan equal to the amount they receive. This distribution may be subject to ordinary income taxes, but a ten percent penalty assessed for non-qualified distributions could be waived, thus converting the Plan from a tax-free vehicle to a tax-deferred vehicle and be used to reimburse the Plan owner (typically their parent).
While there are many options for saving for college, starting early and utilizing tools such as a 529 Plan can help you get a jump start on financing your children’s education and help them get a jump start on their future. To discuss your options for funding education and reaching your financial goals, contact me at 913.814.3800.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Originally published in Johnson County Lifestyle magazine and published for the blog on January 5, 2017 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.
