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Meeting the Education Challenge
How prepared are you to pay for your child’s college education? Did you know that the cost of a college education has increased on average 6% annually? This means that college costs are doubling every 10 years … compared to everything else in the economy doubling every 32 years.
Despite steep tuition costs however, a college education remains the dream of many parents and is a sound investment in your child’s future. All it takes is some planning.
Let’s take a look at one college savings plan – a 529. The main attractions of this type of plan are the potential for federal tax-deferred earnings growth and federal tax-free qualified withdrawals. Other reasons include:
Avoid federal gift taxes. You can contribute up to $13,000 ($26,000 if you and your spouse give and file jointly) each year without owing federal gift taxes, provided you haven’t made other financial gifts to your child in the same year. You also can elect to make a lump-sum contribution of up to $65,000 ($130,000 for married couples filing jointly) in the first year of a five-year period – again, provided you don’t give the child additional taxable gifts during this timeframe.
Create a funding legacy. A 529 plan offers you, the owner, control over the account, including flexibility in naming and changing its beneficiary. For example, if the original beneficiary decides not to attend college or if there’s money left over after your child completes college, you can designate a new beneficiary – a sibling or even a grandchild. This flexibility enables you to establish a college funding legacy for current and future generations.
Consolidate assets. Consolidating assets for one child in a single 529 plan can make them easier to manage. You may be able to transfer a Coverdell Education Savings Account, a custodial account, or another 529 plan without triggering federal income taxes. Your financial advisor can assist in this process. Under certain conditions, proceeds from Series EE and I bonds may also be allowed. Be sure to review the tax implications with a tax professional.
Choose investment options. Many 529 plans offer asset allocations based on the age of the child when the account is opened and the projected year of college. These “age-based” asset allocations are designed to reduce the investment risk as the child approaches college age. Another investment option is based on your risk tolerance – ranging from aggressive to conservative. You can also choose to invest in individual mutual funds.
Maximize financial aid eligibility. Money in 529 accounts is usually considered to be the account owner’s (the parent) assets. As a result, a maximum of 5.6% of the balance is generally assumed to be available for college costs each year, compared with 35% if the assets were in the student’s name. In a custodial account, the assets are considered the student’s. Also, qualified distributions from a 529 plan are not counted as parent or student income and do not affect aid eligibility.
Saving for your child’s college education should be part of an overall Financial Plan that guides you toward achieving your personal financial objectives. Don’t have a Financial Plan? Then, please give me a call. Your first appointment is complimentary.
Edward A. Metz, CFP®, CPA/PFS
LPL Registered Principal
973-895-1133
