COLLEGE SAVINGS 101

Savingforcollege.com

529 Day Webcast Recap
http://www.savingforcollege.com/articles/529-day-webcast-recap-784

Posted: 2015-05-29

by Kathryn Flynn

Earlier today we hosted our annual 529 Day live Q&A webcast, which was moderated by Forbes's Ashlea Ebeling. Our panel of distinguished experts included Savingforcollege.com Founder Joe Hurley, Blue Ocean Global Wealth CEO Marguerita Cheng and USAA Invesments' Caroline Tucker. We were also honored to have Congresswoman Lynn Jenkins give us an update on current 529 plan legislation. Due to some technical difficulties; we were unable to record the event, so here's a quick recap for those of you who weren't able to attend:

Legislative update

Ashlea began our discussion by introducing Rep. Jenkins. Jenkins has been an advocate for 529 plans for quite some time. After President Obama's proposal to remove the federal tax benefits of 529s, Jenkins, along with Rep. Ron Kind (D-W) introduced H.R. 529. This bipartisan legislation would make improvements to the college savings plans such as including computers as a qualified expense, eliminating unnecessary aggregation requirements and allowing 529 account owners to redeposit funds tax-free. The next step is for the bill to be brought to the Senate floor for consideration. When asked if there was any future legislation in the works, Lynn hinted at employer 529 matches, expanding saver credits and IRA rollovers.

But 529 Guru Joe Hurley wants more. He wanted to know if he would ever be able to donate his leftover 529 funds to a college to fund a scholarship. This idea isn't a new one for Hurley. In fact, In 2012, Hurley stated "I would love to be able to donate this money to my alma mater, or to a scholarship-granting charity, so that it can be used to help send someone else's child or grandchild to college, but in doing so I should not have to pay tax and penalty." Rep. Jenkins assured him that future enhancements on leftover 529 money are being discussed.

H.R. 529: withdrawals, reporting and redepositing

Getting started with a 529

The first set of questions focused on how to set up a 529 account. All of the panelists agree that it was a good idea to look at your home state's plan first to see if they offer any tax breaks for residents. But even if your state's plan does offer a deduction, be sure you are comfortable with the investment options available as well as the fees they charge. You can, of course, enroll in almost any state's plan no matter where you live.

Caroline Tucker suggests that before you open a 529 plan, you should build out a plan for each child you are saving for. That includes comparing the expected cost of college attendance versus how much your family can really afford to save each month.

5 simple steps to enrolling in a 529 plan

How do I choose the best plan?

While Joe Hurley claims he's never answered this question directly, he did give us some helpful tips. The right plan for you will depend on a number of factors, including things like your objectives, where you live, how old your kids are and where they will go to college. You'll also have to consider the investment manager. If your retirement account and other investments are all with Fidelity, maybe you'd be more comfortable with a 529 plan managed by Fidelity. Joe also reminds us to consider performance, but know that past performance does not predict future results.

Marguerita Cheng recommends that her clients contribute enough to their home state's plan to get the maximum state tax benefit, and if they are willing and able to save more they contribute the remainder to another state's plan that may have preferable investment options. "It's all about trade-off" says Cheng.

Top 10 direct-sold 529 plans

How does a 529 affect financial aid?

Caroline Tucker assured the audience that 529 plans are treated quite favorably in the Expected Family Contribution (EFC) calculation, which is used to determine financial aid eligibility. Unlike other student-owned assets such as a custodial account under UGMA/UTMA, which are assessed at 20%, only a maximum of 5.64% of a student- or parent-owned 529 plan are brought into the equation.

However, Joe Hurley points out that while a 529 plan owned by a grandparent or other relative is not counted as an asset on the FAFSA, when the funds are withdrawn to pay for college it will count as student income and will be assessed at 50%. This is true regarding any financial support from a relative. Grandparents can still help pay for college, however, by making contributions to a 529 account owned by the parent, or they can always try to transfer ownership to the parent. If those are not realistic options, the grandparent can wait to withdraw from the 529 account until the student's junior year of college, when they will not be applying for any more financial aid. Joe and Caroline also point out that these rules only apply to federal student aid, and that schools that offer their own scholarships may consider 529 plans differently.

15 facts about financial aid eligibility

Why is a 529 better than a regular savings account?

Marguerita, who is the mother of a college freshman, reminds us that families should have cash and money market accounts for the short term, but they should definitely take advantage of tax-advantaged account such as 529 plans for long-term saving. If her clients are fearful of stock market volatility, she reminds them that there are conservative 529 options available. Joe adds that College Savings Bank even offers FDIC insured options.

Caroline says that when funds are specifically earmarked for a child's future education, families are three times more likely to meet their savings goal. There is also a psychological impact of putting the account in the child's name.

10 things we love most about 529 plans

So what happens when the money isn't used for college?

Joe reminds us that the greatest fear a family has when saving with a 529 plan is that they will have to pay the 10% penalty tax on the earnings portion of the account for a non-qualified withdrawal. But he argues that these fears are almost unwarranted, since instead of taking out the money you can easily change the beneficiary, save the funds for a grandchild or even go back to school yourself. In fact, since Joe isn't able to donate his leftover funds without penalty, he is currently taking classes at Fingerlakes Community College.

Caroline also notes that in cases there are cases where the penalty is waived. For example, if the student gets a scholarship you can take a penalty-free non-qualified withdrawal up to the amount of the award, and if the student decides to attend a U.S. Military Academy the penalty is also waived. Keep in mind, though, that you will still pay income tax on the earnings portion of these withdrawals.

Scoring an athletic scholarship

What are prepaid tuition plans?

Joe explains that prepaid tuition plans allow you to pay now for future tuition, usually at a discounted rate. These types of plans are quite different from 529 college savings plans, mainly because you usually are saving for your in-state public school (except for the Private College 529 Plan, which includes over 300 private colleges across the country). If you choose to go to an out-of state school you can still cash out your prepaid plan and are guaranteed a 2% return. Unfortunately, only a few states still have prepaid plans as many states had to shut them down. If your state does offer one, Joe suggests checking it out.

Is there a prepaid 529 plan in your future?

What are some drawbacks of 529 plans?

Caroline says that it can be easy for parents to forget about other expenses that are not considered qualified, such as transportation costs. This is where it might be appropriate to have an additional regular savings account. Joe admits that 529 fees are sometimes slightly higher than other investments such as mutual funds, but these have come down significantly in recent years. Also, grandparents who own 529 accounts for their grandchildren are often surprised to learn that the plan value is counted as part of their assets if they need to apply for Medicaid.

Before you open a grandparent 529 account

How much should I save for my one- and three-year-old children?

Marguerita stresses the fact that the important thing is to get started, no matter how small your initial contribution. She says Savingforcollege.com has "amazing calculators" that can give you an idea about how much to put away each month. Yet she also reminds parents not to get scared off by the recommended contribution amounts. Marguerita has three children, and she tells us that the cost of the first two going to college was more than the price of her first home! So when the calculator tells you you're going to need $800 a month to make college happen, don't let that scare you. Any amount you can save now is better than nothing.

The magic number for college savings

Earlier today we hosted our annual 529 Day live Q&A webcast, which was moderated by Forbes's Ashlea Ebeling. Our panel of distinguished experts included Savingforcollege.com Founder Joe Hurley, Blue Ocean Global Wealth CEO Marguerita Cheng and USAA Invesments' Caroline Tucker. We were also honored to have Congresswoman Lynn Jenkins give us an update on current 529 plan legislation. Due to some technical difficulties; we were unable to record the event, so here's a quick recap for those of you who weren't able to attend:

Legislative update

Ashlea began our discussion by introducing Rep. Jenkins. Jenkins has been an advocate for 529 plans for quite some time. After President Obama's proposal to remove the federal tax benefits of 529s, Jenkins, along with Rep. Ron Kind (D-W) introduced H.R. 529. This bipartisan legislation would make improvements to the college savings plans such as including computers as a qualified expense, eliminating unnecessary aggregation requirements and allowing 529 account owners to redeposit funds tax-free. The next step is for the bill to be brought to the Senate floor for consideration. When asked if there was any future legislation in the works, Lynn hinted at employer 529 matches, expanding saver credits and IRA rollovers.

But 529 Guru Joe Hurley wants more. He wanted to know if he would ever be able to donate his leftover 529 funds to a college to fund a scholarship. This idea isn't a new one for Hurley. In fact, In 2012, Hurley stated "I would love to be able to donate this money to my alma mater, or to a scholarship-granting charity, so that it can be used to help send someone else's child or grandchild to college, but in doing so I should not have to pay tax and penalty." Rep. Jenkins assured him that future enhancements on leftover 529 money are being discussed.

H.R. 529: withdrawals, reporting and redepositing

Getting started with a 529

The first set of questions focused on how to set up a 529 account. All of the panelists agree that it was a good idea to look at your home state's plan first to see if they offer any tax breaks for residents. But even if your state's plan does offer a deduction, be sure you are comfortable with the investment options available as well as the fees they charge. You can, of course, enroll in almost any state's plan no matter where you live.

Caroline Tucker suggests that before you open a 529 plan, you should build out a plan for each child you are saving for. That includes comparing the expected cost of college attendance versus how much your family can really afford to save each month.

5 simple steps to enrolling in a 529 plan

How do I choose the best plan?

While Joe Hurley claims he's never answered this question directly, he did give us some helpful tips. The right plan for you will depend on a number of factors, including things like your objectives, where you live, how old your kids are and where they will go to college. You'll also have to consider the investment manager. If your retirement account and other investments are all with Fidelity, maybe you'd be more comfortable with a 529 plan managed by Fidelity. Joe also reminds us to consider performance, but know that past performance does not predict future results.

Marguerita Cheng recommends that her clients contribute enough to their home state's plan to get the maximum state tax benefit, and if they are willing and able to save more they contribute the remainder to another state's plan that may have preferable investment options. "It's all about trade-off" says Cheng.

Top 10 direct-sold 529 plans

How does a 529 affect financial aid?

Caroline Tucker assured the audience that 529 plans are treated quite favorably in the Expected Family Contribution (EFC) calculation, which is used to determine financial aid eligibility. Unlike other student-owned assets such as a custodial account under UGMA/UTMA, which are assessed at 20%, only a maximum of 5.64% of a student- or parent-owned 529 plan are brought into the equation.

However, Joe Hurley points out that while a 529 plan owned by a grandparent or other relative is not counted as an asset on the FAFSA, when the funds are withdrawn to pay for college it will count as student income and will be assessed at 50%. This is true regarding any financial support from a relative. Grandparents can still help pay for college, however, by making contributions to a 529 account owned by the parent, or they can always try to transfer ownership to the parent. If those are not realistic options, the grandparent can wait to withdraw from the 529 account until the student's junior year of college, when they will not be applying for any more financial aid. Joe and Caroline also point out that these rules only apply to federal student aid, and that schools that offer their own scholarships may consider 529 plans differently.

15 facts about financial aid eligibility

Why is a 529 better than a regular savings account?

Marguerita, who is the mother of a college freshman, reminds us that families should have cash and money market accounts for the short term, but they should definitely take advantage of tax-advantaged account such as 529 plans for long-term saving. If her clients are fearful of stock market volatility, she reminds them that there are conservative 529 options available. Joe adds that College Savings Bank even offers FDIC insured options.

Caroline says that when funds are specifically earmarked for a child's future education, families are three times more likely to meet their savings goal. There is also a psychological impact of putting the account in the child's name.

10 things we love most about 529 plans

So what happens when the money isn't used for college?

Joe reminds us that the greatest fear a family has when saving with a 529 plan is that they will have to pay the 10% penalty tax on the earnings portion of the account for a non-qualified withdrawal. But he argues that these fears are almost unwarranted, since instead of taking out the money you can easily change the beneficiary, save the funds for a grandchild or even go back to school yourself. In fact, since Joe isn't able to donate his leftover funds without penalty, he is currently taking classes at Fingerlakes Community College.

Caroline also notes that in cases there are cases where the penalty is waived. For example, if the student gets a scholarship you can take a penalty-free non-qualified withdrawal up to the amount of the award, and if the student decides to attend a U.S. Military Academy the penalty is also waived. Keep in mind, though, that you will still pay income tax on the earnings portion of these withdrawals.

Scoring an athletic scholarship

What are prepaid tuition plans?

Joe explains that prepaid tuition plans allow you to pay now for future tuition, usually at a discounted rate. These types of plans are quite different from 529 college savings plans, mainly because you usually are saving for your in-state public school (except for the Private College 529 Plan, which includes over 300 private colleges across the country). If you choose to go to an out-of state school you can still cash out your prepaid plan and are guaranteed a 2% return. Unfortunately, only a few states still have prepaid plans as many states had to shut them down. If your state does offer one, Joe suggests checking it out.

Is there a prepaid 529 plan in your future?

What are some drawbacks of 529 plans?

Caroline says that it can be easy for parents to forget about other expenses that are not considered qualified, such as transportation costs. This is where it might be appropriate to have an additional regular savings account. Joe admits that 529 fees are sometimes slightly higher than other investments such as mutual funds, but these have come down significantly in recent years. Also, grandparents who own 529 accounts for their grandchildren are often surprised to learn that the plan value is counted as part of their assets if they need to apply for Medicaid.

Before you open a grandparent 529 account

How much should I save for my one- and three-year-old children?

Marguerita stresses the fact that the important thing is to get started, no matter how small your initial contribution. She says Savingforcollege.com has "amazing calculators" that can give you an idea about how much to put away each month. Yet she also reminds parents not to get scared off by the recommended contribution amounts. Marguerita has three children, and she tells us that the cost of the first two going to college was more than the price of her first home! So when the calculator tells you you're going to need $800 a month to make college happen, don't let that scare you. Any amount you can save now is better than nothing.

The magic number for college savings

 

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