Planning for Today and Tomorrow: 529 Plans

Written by: Andy Collado, Financial Coach, The Financial Clinic

Want to know the secret to financial success for you and your children? Goals. As a financial coach, I have seen countless families turn their finances around simply by focusing on a forward thinking, strengths-based, and most importantly, passionately held financial goal. One of the most common motivators is the desire to provide a better future for our children, a better foundation for their success. The best way to do this is with sound educational planning.

Degrees equal dollars. That statement rings true in two important ways for our children’s futures. Unemployment rates for high school graduates are almost double ( 5.2: 2.7) that of Bachelor’s degree holders, and they make almost half of the median weekly earnings ($692: $1156). Over a lifetime, this difference rings up at a whopping million dollars. These gains come with costs of course: college tuition, room and board, textbooks, and so on. These costs have also risen astronomically faster than both inflation and income in the past 30 years. Suffice to say, higher education is getting more costly and yet more necessary with every passing school year. By using strategic and advantageous savings vehicles such as 529 plans, we can lower our current financial risk while increasing our children’s earning potential.

529 College Savings Plan, named for the associated section of the IRS Tax Code, are tax-advantaged savings plans specifically for educational expenses. Up until 2017, they could only be used for higher education, or college, costs but recent tax code changes have opened up the qualified withdrawals to include tuition and fees for K-12 programs as well.  But why should you choose 529s over other investment or simple savings vehicles? Let’s take a look. The benefits of a 529 include:

  • Your contributions will grow tax-free and withdrawals will be distributed tax-free for any “qualified” expense, which includes tuition, fees, room and board for college students, books and other supplies.
  • 34 states allow for a hefty amount of your contributions to a 529 to be deducted from your taxable income. In New York State, single filers can deduct up to $5,000 and couples filing together can deduct up to $10,000.
  • Contributions in a 529 account can be withdrawn to use at any school regardless of which state the 529 was opened in.

Children with as little as $1 – $499 in savings are three times more likely to attend and four times more likely to graduate college, so even if you don’t consider the amount you can realistically put into a 529 to be substantial, even one or two small deposits can make a huge difference in your child’s life.  Any amount gets them closer to their educational goals, and making regular contributions doesn’t have to mean cutting into every paycheck. Because contributions can come from anyone, not just the account owner, you can also boost the balance of your 529 by allowing friends and family to contribute for special occasions such as a birthday, or by putting a portion of your tax refund directly into the account.

We know that education is important. We also know that it can be expensive. If a 529 account sounds like it might be a good option for you (hint: if you have someone in your family with educational expenses, it most likely is something to consider!) there are few simple things you can do to get started:

  1. Research the 529s available in your state or with financial institutions you trust.
  2. Speak with a financial coach to talk through yours and your children’s goals to figure out the best way to utilize one of these accounts. (If you are in NYC, you can schedule an appointment with one of our free financial coaches, or check to see if we can connect you to a partner in your region you with this link!)

Finally, are you worried that the money will potentially be wasted if for some reason your child decides not to go to college?  Let’s say they become the next Silicon Valley college dropout billionaire, hall of fame basketball player, or they just go out and get themselves a full ride, leaving the contributions in their 529 without purpose; what happens then? Well, another great benefit of 529 plans is the ability to change the beneficiary to anyone, including yourself. So if they are off creating the next new addictive FinTech product or dunking on anyone except the NY Knicks, you can head back to school and take that pottery class you always wanted to take or learn a second language. It’s a win-win, today and tomorrow.