$aving for College
The cost of higher education is continuing to increase at a staggering pace. One of the best things you can do to help prepare for this major life expense is to save money by contributing to a 529 account. According a recent study on higher education costs by The College Board, the average in state college tuition is $8,893 a year, $22,203 for out-of-state schools and over $30,000 a year for private colleges. Add room and board, books, and lab fees, and that can push the cost up another $10,000-$12,000 a year.
A 529 is a type of savings plan sponsored by a state or institution that allows individuals to put money aside for college savings. Every state sponsors at least one 529 plan, and you are not limited to using the plan for the state in which you live. Some may have higher fees, different investment options, or have different overall contribution limits. It is important to examine the details of a plan before selecting one which will work best for your needs.
Most 529 plans allow you to use the funds at any qualified college, public or private, inside or outside of the state in which the plan is held. The account owner, usually a parent or guardian, maintains full control of the account. This includes naming the beneficiary and deciding how the funds will be both invested and distributed. The funds in these accounts are invested and when the time comes they can be used to pay for qualified higher education expenses. These include tuition, books, room and board and other cost directly associated with college.
The real advantage of the 529 plan comes in the form of tax deferral. The sooner one begins to fund a 529 the larger that benefit becomes as the account grows. You are not taxed on any withdrawals that come from the contributions you made to the account, and any distributions for qualified higher education expenses are federal income tax free. However if funds are removed from the account for any reason other than higher education cost, the earnings are subject to federal taxes, state taxes, and a hefty 10% penalty.
Anyone may contribute to a 529 plan on behalf of the beneficiary. There are few limiting factors on how much you can contribute to a plan. Contributions to the plan can’t exceed the amount that is truly necessary to pay for the beneficiary’s qualified education expenses, and individuals contributing to the plan need to be sure to stay under the gift tax limits outlined by the IRS.* In addition, each plan defines its own maximum overall contribution amount.
There are two main types of 529 plans, and each offers a very different approach to investing. Traditional 529 college savings plans, and prepaid tuition plans. Contributions to a 529 college savings plan are usually invested in predetermined portfolios that are often age or risk based. This relieves the account owner from the burden of making the investment decisions and puts it in the hands of a qualified portfolio manager. Typically these investments can be changed once a year.
The other type of 529 is the prepaid tuition plan. Washington State’s program is called the Guaranteed Education Tuition or GET program. The GET program allows you to buy tuition units, and like most 529 plans, the units can be used at any qualifying institution nationwide. One GET unit is equal to 1/100th of actual undergraduate tuition, and the value of a unit is adjusted every year to stay in line with the cost of tuition in Washington State. GET units are sold at a premium above the current payout value and the state guarantees that the money you put into GET will keep pace with tuition in the future.
College tuition has the potential to be one of the largest expenses we can face. Starting a savings, or prepaid tuition plan when the child is young can help alleviate the burden of this expense, and help make college a reality for your child or grandchild. Let us know if you have any questions about saving for education. As always we are more than happy to help!
* For 2014, contributions plus other gifts, to a particular beneficiary may not exceed $14,000 per individual during the tax year or $28,000 per married couple. However, you may make a large contribution up to $70,000 for an individual, or $140,000 per married couple using the five year election. To do this you must use IRS form 709 to spread the reporting of the contributions over five years. This allows you to avoid the gift taxes associated with exceeding the gifting limits in one year.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.