COLLEGE SAVINGS 101

Savingforcollege.com

More Americans are saving for college with 529 plans
http://www.savingforcollege.com/articles/more-americans-are-saving-for-college-with-529-plans-914

Posted: 2016-03-19

by Kathryn Flynn

News flash: College is expensive. According to the College Board, students paid almost $20,000 this year for tuition, fees and room and board at a four-year in-state school, and those who attended a private college paid double that amount, which means in total you could end up paying well over six figures for a degree. So for most families, being able to afford college will take some planning.

There are a number of different ways to save for future college costs, but new data from the College Savings Plans Network (CSPN) shows that more parents and grandparents are opting to stash their money in 529 plans than ever before. In fact, at the end of 2015 there were 12.5 million active 529 accounts in the U.S., compared to 12.1 million accounts just one year earlier. And 55 percent of these accounts received contributions in 2015, up from 53 percent in 2014.

The amount of money families are putting in 529 accounts is also increasing. In 2015, $25.7 billion was added to 529 plans across the country, up from $24.4 billion in 2014, and $18.0 billion in 2010. And despite volatile market conditions during the later part of 2015, total assets in 529 plans rose by 2.1 percent from the start to the finish of 2015.

What's so great about 529 plans?

When you invest in a 529 plan, any gains in the account will grow tax-free and won't be taxed at withdrawal as long as the money is used to pay for college expenses like tuition, room and board and computers. And if you pay state income tax, you might get a deduction or credit for your contributions. In most cases, to get this benefit you'd have to use your home state's plan, but if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania, you'll get a tax benefit for investing in any state's plan.

Did we mention that you don't have to use your home state's 529 plan? In fact, there are over 90 plans available throughout the U.S., each offering different investment options. You'll want to start by checking out your home state's plan to see if they offer any matching contributions or other benefits, but be sure to review the plan's investment performance and fees. If something doesn't seem right, it might be a good idea to shop around.

Assets in a 529 plan also receive favorable treatment on the Free Application for Federal Student Aid (FAFSA). Normally, a financial aid award package would be reduced by 20 percent of the value of student owned assets. But 529 plans, whether owned by the student or one of their parents, are always counted as a parent asset and assessed at a maximum 5.64 percent. So if you have $10,000 saved, that's $564 versus $2,000.

And let's not forget about flexibility. Almost anyone can invest in a 529 plan, regardless of their age or annual household income, and your savings can be used toward courses any eligible post-secondary institution, including trade schools and study abroad programs. If your child decides not to pursue any type of education after high school, you can always change the beneficiary to another family member.

Those who want to make a larger contribution, like a grandparent, can deposit up to $14,000 per year without triggering a gift tax. If they're looking to remove a larger amount of money from their estate, they can elect to treat an annual contribution of $14,000-$70,000 as if it were made over five years.

How can you get started?

You can enroll in most 529 plans directly through their website, but there are also some plans that have to be purchased from a financial advisor. You'll pay an extra sales charge with an advisor-sold plan, but if you're new to investing and would like some guidance, the added cost might be worth it to you.

For example, an advisor may be able to help you decide between an age-based or static investment option. Static portfolios will focus on one particular strategy (growth, stability, etc.) and remain the same throughout the life of the account unless you manually make a change, which you're allowed to do twice per year. Investments in an age-based option, on the other hand, will be automatically shifted based on the number of years the beneficiary has until college. So a younger child's plan will be more heavily weighted toward stocks and will move toward more conservative fixed income options as they get older. In other words, with an age-based portfolio the plan does some of the work for you.

There's a helpful tool available at Savingforcollege.com that lets you compare the features of all of the different 529 plans available. Once you've made your decision, you can link your college savings plan to a checking or savings account to set up automatic contributions. There's noting to report on your tax return until you take your first withdrawal, so the only thing you'll have to do until then is monitor your investment performance to make sure you're on track to meet your goals.

News flash: College is expensive. According to the College Board, students paid almost $20,000 this year for tuition, fees and room and board at a four-year in-state school, and those who attended a private college paid double that amount, which means in total you could end up paying well over six figures for a degree. So for most families, being able to afford college will take some planning.

There are a number of different ways to save for future college costs, but new data from the College Savings Plans Network (CSPN) shows that more parents and grandparents are opting to stash their money in 529 plans than ever before. In fact, at the end of 2015 there were 12.5 million active 529 accounts in the U.S., compared to 12.1 million accounts just one year earlier. And 55 percent of these accounts received contributions in 2015, up from 53 percent in 2014.

The amount of money families are putting in 529 accounts is also increasing. In 2015, $25.7 billion was added to 529 plans across the country, up from $24.4 billion in 2014, and $18.0 billion in 2010. And despite volatile market conditions during the later part of 2015, total assets in 529 plans rose by 2.1 percent from the start to the finish of 2015.

What's so great about 529 plans?

When you invest in a 529 plan, any gains in the account will grow tax-free and won't be taxed at withdrawal as long as the money is used to pay for college expenses like tuition, room and board and computers. And if you pay state income tax, you might get a deduction or credit for your contributions. In most cases, to get this benefit you'd have to use your home state's plan, but if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania, you'll get a tax benefit for investing in any state's plan.

Did we mention that you don't have to use your home state's 529 plan? In fact, there are over 90 plans available throughout the U.S., each offering different investment options. You'll want to start by checking out your home state's plan to see if they offer any matching contributions or other benefits, but be sure to review the plan's investment performance and fees. If something doesn't seem right, it might be a good idea to shop around.

Assets in a 529 plan also receive favorable treatment on the Free Application for Federal Student Aid (FAFSA). Normally, a financial aid award package would be reduced by 20 percent of the value of student owned assets. But 529 plans, whether owned by the student or one of their parents, are always counted as a parent asset and assessed at a maximum 5.64 percent. So if you have $10,000 saved, that's $564 versus $2,000.

And let's not forget about flexibility. Almost anyone can invest in a 529 plan, regardless of their age or annual household income, and your savings can be used toward courses any eligible post-secondary institution, including trade schools and study abroad programs. If your child decides not to pursue any type of education after high school, you can always change the beneficiary to another family member.

Those who want to make a larger contribution, like a grandparent, can deposit up to $14,000 per year without triggering a gift tax. If they're looking to remove a larger amount of money from their estate, they can elect to treat an annual contribution of $14,000-$70,000 as if it were made over five years.

How can you get started?

You can enroll in most 529 plans directly through their website, but there are also some plans that have to be purchased from a financial advisor. You'll pay an extra sales charge with an advisor-sold plan, but if you're new to investing and would like some guidance, the added cost might be worth it to you.

For example, an advisor may be able to help you decide between an age-based or static investment option. Static portfolios will focus on one particular strategy (growth, stability, etc.) and remain the same throughout the life of the account unless you manually make a change, which you're allowed to do twice per year. Investments in an age-based option, on the other hand, will be automatically shifted based on the number of years the beneficiary has until college. So a younger child's plan will be more heavily weighted toward stocks and will move toward more conservative fixed income options as they get older. In other words, with an age-based portfolio the plan does some of the work for you.

There's a helpful tool available at Savingforcollege.com that lets you compare the features of all of the different 529 plans available. Once you've made your decision, you can link your college savings plan to a checking or savings account to set up automatic contributions. There's noting to report on your tax return until you take your first withdrawal, so the only thing you'll have to do until then is monitor your investment performance to make sure you're on track to meet your goals.

 

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