A decade ago, options for LGBT community members to start a family were limited. The idea of needing to plan for a child’s education was often uncommon in our community. With marriage equality and greater acceptance across the country, along with the growing numbers of families, the need to plan for a child’s education has increased.
Whether it is for your own child or for a niece or nephew, below are some helpful tools to ensure today’s youth can afford educational opportunities.
The primary vehicle people use to save for a child’s education is a 529 plan. There are two types of plans – prepaid tuition and a savings plan. Prepaid tuition is exactly what it sounds like – you are buying public university credit hours at the current cost no matter what it may be in the future. This could be advantageous if you already know that the child plans to attend a specific university (whether it’s for a specific degree program or to add to your family’s lineage at a certain university).
A more flexible option is a savings plan, which historically has been used to pay for higher education whether it’s a traditional four-year college or an accredited trade school. Basically, if you can receive federal loan assistance at the institution, you may use your 529 to cover associated costs. These plans are funded using post-tax dollars meaning you don’t receive a federal tax credit or extra deduction as you would if you contributed to an IRA. However, you may receive some tax benefits depending on your home state and where you open the account. No matter what, any investment gains or ‘growth’ is tax free as long as your use the funds for qualified educational expenses. This could be tuition, books, equipment (e.g. laptop) or any other approved expenses that furthers an education pursuit.
The 529 savings plans are administered at the state level and are fairly flexible. Investment wise they operate like a 401k with a variety of fund options, but as always, make sure you watch out for any associated fees. You don’t want your potential gains being eaten up by an investment manager. As alluded to before, you may receive tax benefits on the state level. For instance in the District, you can receive an $8,000 tax deduction (if filing married and jointly). Each state is different though and you should consult a tax advisor or do your own research to make sure you can maximize its benefits. However, most jurisdictions will only offer tax benefits if you live in that state and open their 529 account.
The most recent tax reform bill expanded the allowable use of 529 funds to include K-12 educational expenses. This is on a state-by-state basis and many have not conformed with the updated federal law. So for now, I would focus on its use for higher education, although Maryland and Virginia have expanded to offer some K-12 benefits.
One interesting quirk about 529 plans is how easy it is to change beneficiaries. For instance, you could open a 529 with you as a beneficiary in case you wanted to pursue a new educational venture and then a few years later change the beneficiary to a qualified individual. The qualification is pretty flexible and includes anyone that is part of the current beneficiary’s family, including even their first cousins.
Overall, starting a 529 savings plan is a smart, flexible choice for most families and even yourself if you want to pursue a new career, finish your degree, or take a few interesting classes at your local college.