When you found out that you’re welcoming a baby, you didn’t know where to put all that happiness as much as your shopping cart had no more room for all the baby products you wanted to buy. Before he/she even sets foot at home, you’d have already filled your nursery with a cradle, toys, feeding bottles, clothes, and many more.
While the wait seemed long, their growth will feel extremely fast; clothes outgrown; toys untouched. Before you even know it, they’ll be off to college, and now you wish you could’ve been as prepared as you were when you first held them in your arms.
Luckily, there are a variety of investment options for parents, grandparents, and guardians who are planning to save up for their children’s college education, one of which is a 529 plan.
529 plans, named after Section 529 of the U.S. Tax Code, are savings plans sponsored by states, state agencies, or educational institutions that offer special tax benefits like deduction of contributions from state income tax, exemption of earnings from federal income tax and, in most cases, from state income tax.
Types of 529 Plans
The types of 529 plans are Prepaid Tuition Plans and Education Savings Plans.
- Prepaid Tuition Plans – The account holder purchases units or credits at participating colleges and universities which may be used by his/her beneficiary’s future tuition fees and other mandatory fees.
- Education Savings Plans – These are investment accounts that cover the beneficiary’s qualified higher education expenses which may include not only tuition and mandatory fees, but also room and board and textbooks.
These two plans differ in that prepaid tuition plans can only cover tuition and mandatory fees, while the coverage of education savings plans is more extensive as it can include room and board, books, supplies, as well as computers and related technology costs.
You can change your beneficiary.
Changing a designated beneficiary is non-taxable as long as the new beneficiary is a member of the family of the previously designated beneficiary. You can even change it to yourself and still get the special tax benefits.
You can roll over any amount from your qualified tuition plan (QTP) to another, tax-free.
Like changing your beneficiary, rollovers don’t have income tax consequences. A tax-free rollover is one where the distribution of any amount from a qualified tuition plan (QTP) is rolled over to:
- Another QTP for the benefit of the same beneficiary or of a member of the beneficiary’s family;
- A 529 ABLE Account for the benefit of the same beneficiary or of a member of the beneficiary’s family.
For purposes of rollovers and change of designated beneficiary, a member of the beneficiary’s family as provided by the Internal Revenue Service refers to any of the following:
- Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them;
- Brother, sister, stepbrother, or stepsister;
- Father or mother or ancestor of either;
- Stepfather or stepmother;
- Son or daughter of a brother or sister;
- Brother or sister of father or mother;
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- The spouse of any individual listed from items 2 to 8;
- First cousin.
Special Tax Benefits
- Tax-Deferred Growth
Your earnings in the plan grow federal tax-free. This rakes in a huge amount of savings on income tax as opposed to other investment vehicles where earnings are taxable and withdrawals are subject to capital gains tax.
- State Tax Deduction or Credit
Although, 529 plan contributions are not deductible on federal income tax, some states offer a tax deduction or credit if you contribute to your home state’s 529 program.
In Wisconsin, the maximum deduction is $3,560 ($1,780 for married filing separate status and divorced parents of a beneficiary) per beneficiary per year.
- Tax-Free Distributions
Distributions from the plan are not taxable, provided that they are used for qualified education expenses. Otherwise, distributions are subject to tax and a 10% penalty.
- Estate Tax Exemption
Putting money in a 529 account can reduce or help you avoid federal estate tax because funds in such account are exempt from federal estate tax.
- Gift Tax Exclusion and Accelerated Gifting
Meanwhile, while contributions to 529 plans are considered gifts for tax purposes, the law grants you with a gift tax exclusion of up to $15,000 ($30,000 for married couple) per beneficiary per year. You can also opt for accelerated gifting using five-year gift tax averaging, which means that you can make a lump-sum contribution of $75,000 ($150,000 for married couple) which is five times the annual gift tax exclusion. This contribution will be treated as though it were spread over five years, making it still eligible for gift tax exclusion.
Edvest 529 College Savings Plan
Edvest is a state-sponsored 529 college savings plan in Wisconsin that offers a tax-advantaged investment option for parents, grandparents, or any other guardian.
How Much Should You Save?
The amount that you should put away for your child’s college education depends on the costs at the universities you’re looking at. You can check those universities’ websites for the current rates and estimate what the costs will be in the future or how much those costs will increase. You can reach out to MBE Wealth and we can help you with the projections and help you figure out how much you should save.
Other Ways to Save
1. Look into all of your loans.
Look into all of your loans to find out if you are eligible for loan forgiveness or if you can consolidate any of these loans or refinance.
2. Search for Grants and Scholarships.
You can also search for available scholarships and grants in universities or colleges that your child may be eligible for to cut back on the cost.
Starting early is key when saving for college as it will give you time to plan ahead as well as give your money more time to grow.
As they say, it is not about market timing when you invest in the market, it is about your time in the market.
Sometimes, market timing can help you win big within a short span of time. However, outsmarting the market through market timing is risky and has its costs, because the future, although sometimes predictable, is marred with uncertainties. In contrast, “time in the market” focuses on reaching long-term goals. Rather than buying low and selling high, a “time in the market” investor will buy the market regardless of the timing and will stick with the market until he/she reaches his/her goal like saving for college.
If you don’t know how to begin or need advice on goal-setting, contact us now and we’ll help you make the most of your investment and reach your financial goals.