July 9, 2018 at 11:45 am EST | by Greg Klingler
Building a college savings plan
529 plan, gay news, Washington Blade

If you’re saving for a loved one’s college expenses, look into a 529 plan.

Ensuring your children’s success in the future is a goal of every parent. In many cases, education becomes the focus of this goal. Over the years, as tuition costs have risen, parents have become increasingly concerned about their ability to fund these high costs. Proactive parents have used many approaches to fund future education costs, but all have had drawbacks:

Setting up a savings account or investing in a mutual fund to meet this anticipated expense, but all these earnings are taxable at the parent’s income tax level

Setting up a Uniform Gift (Transfers) to Minors Act custodian account, but this account offers no control to the parents after the child reaches the age of maturity

Buying certain Federal Savings Bonds, but these investments only provide tax benefits to people below relative low income thresholds.

There had to be a better way

In 2001, the modern form of the Section 529 Plan, legally known as “qualified tuition plans,” was born and in 2006 the Pension Protection Act made its benefits permanent. The section 529 plan is a state-sponsored plan that was designed to:

Allow tax-free distributions (both contributions and earnings) for all accredited college expenses including tuition, room, board and books).

Allow individuals to invest in and maintain control of assets on behalf of a beneficiary in an account

In addition, many states offer state income tax deductions on contributions to these accounts as an incentive to investing. It is important to note that while individual states offer state-sponsored 529 plans, the federal benefit of tax-free withdrawals extend throughout the country.

More benefits of 529 plans

In 2018, the benefits of the 529 plan were improved. All section 529 plans now allow tax-free distributions for tuition expenses for public or private schools (elementary, middle and high school), and in many cases 529 plans have now become the most robust way to save for a child’s primary or secondary education.

There are two types of 529 plans:

Prepaid tuition plans: Paying a known amount at designated intervals for a prepaid level of tuition. The value of tuition may be prorated for different institutions depending on cost.

Education savings plans:  These are investment accounts, and the account value is used to fund education expenses.

Government employees who are members of GEBA (Government Employees’ Benefit Association) can take advantage of an employer-based mutual fund, which is more cost efficient then their broker-sold counterparts. As you consider your options available to save for your children’s education, be sure to discuss your plan with a financial professional to understand the impact it may have on the Federal Student Aid application.

The earlier you start, the more time you have to grow your investment.

Here are seven savings advantages of 529 plans:

Withdrawals are tax-free for any accredited school in any state, no matter which state you plan to invest in.

Contributions may be tax deductible on your state tax returns (check with your tax professional for details).

Money can be transferred between immediate family members (such as siblings).

Earnings in 529 plans grow tax-free.

Contributions can be set up to invest monthly/quarterly, etc., for ease of investing.

You can contribute up to $15,000 per person per year ($30,000 for a couple).

If you have your retirement plan comfortably in place, the next important step many families choose to take is saving for your loved one’s education. Contact your financial adviser today to see how you could potentially use an affordable 529 plan to help pay for a loved one’s education.

 

Greg Klingler is director of wealth management at the Government Employees’ Benefit Association (GEBA), a nonprofit offering insurance and investment options and financial planning services to federal employees and retirees.

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