Following up from my earlier post on Virginia’s inVEST 529 I want you to know what a 529 plan is and why it’s worth your consideration if you plan to help someone you care about pay for college. 529 College Savings Plans are state sponsored programs that are specifically designed to save toward qualified higher education costs. Several of the clients of Independent Financial Planning have used 529 plans effectively to pay for some or all of their children’s college.
There are several unique benefits of 529 plans. For example, if you contribute to the 529 program in your state, the amount you contribute will be state-tax exempt. And you won’t pay federal or state taxes on any of the gains in the account if it’s used toward college. Another benefit to saving in the 529 has to do with financial aid. Any savings that a parent has in a brokerage or bank account will be calculated to determine a parent’s “expected family contribution” or EFC. Only 5.64% of the savings in a 529 is considered part of the EFC whereas non-529 savings is considered at 20%.
A couple other major benefits of 529 plans regard ownership and flexibility. The owner of the plan, often a parent but can be a grandparent or even someone not related to the beneficiary, controls the account for the life of the account. So if the beneficiary receives a scholarship and doesn’t need the savings, the account owner can change the beneficiary to anyone else in the beneficiary’s family. There are no limits on how many people can contribute to the account and the account has a very high contribution limit. There are also no limits on how many times the beneficiaries are changed.
One item to keep in mind is that the IRS does consider a contribution to a 529 a gift to the beneficiary so gift tax will come into account if your total gifts are above the IRS threshold currently $14,000.
The flexibility with regard to the beneficiaries and the tax benefits are often the best reasons for saving in a 529. Below is a chart showing the initial contribution of $1,000 followed by contributions of $300 per month for 18 years. Assuming a 6% rate of return and a 28% tax bracket, saving in a 529 will result in $15,477 more. This doesn’t include the state income tax saving of using the 529 in your state, which would be an additional boost (if your home state has income tax).
Source: JPMorgan College Planning Essentials
529 plans also come in a variety of types. Here in Virginia, the largest 529 program in the country, a saver can choose from an FDIC insured program called “College Wealth”, prepaid tuition credits called “prepaid”, a financial advisor program managed by American Funds called “College America”, and a direct program from the 529 administrator called “inVEST”.
Are you interested in starting a 529? You can contact Independent Financial Planning or the Virginia529 program. Below is a video directly from the Virginia529 website with introductory details about the various plans. Independent Financial Planning encourages you to save wisely based upon your financial goals and what is important to you. Let me help you do that.
