COLLEGE SAVINGS 101

Savingforcollege.com

Should you use your employer-sponsored 529 plan?
http://www.savingforcollege.com/articles/the-new-employee-benefit-everyone-s-talking-about-931

Posted: 2016-05-17

by Kathryn Flynn

401(k)s, health insurance, gym memberships, childcare services– these are just some of the perks commonly offered to employees working in the U.S. And as companies become more aware of the importance of financial wellness, some are also starting to help save for future college bills by offering 529 plans as a voluntary benefit. 529 plans allow families to put away money that will grow tax-free as long as it is eventually spent on qualified higher education expenses.

The idea is that employer-sponsored 529 plans will get more families to save for college just as 401(k) plans helped grow retirement savings. According to the Employee Benefit Research Institute, companies began offering 401(k) plans in 1982 and just 14 years later, total assets in the plans topped one trillion dollars. And just like retirement, most families will need to be prepared if they want their children to get a degree without going into massive debt. A 529 plan makes it easy to save - a parent with a newborn who makes monthly deposits of just $100 would have over $38,000 by the time the child is ready for college, assuming a 6 percent annual investment return. At today's prices, that amount would cover two years of tuition, fees and room and board at an in-state public school, according to the College Board.

Higher education is an essential part of a community's future prosperity and economic mobility, which is why some states are encouraging employers to offer 529 plans. Nevada and Illinois currently offer employers a tax credit for matching employee 529 plan contributions.

Employee incentives

Just about anyone can open a 529 plan, even if it's not offered through your employer. Most states offer a direct-sold plan, which you can sign up for online, or an advisor-sold plan, which has to be opened through a financial advisor. But sometimes there are compelling reasons to use the plan your company offers.

According to Savingforcollege.com's 2016 Annual College Savings Survey, 72 percent of families who wanted to open a 529 plan said they don't know the steps involved, and 36 percent said that they would enlist the help of a financial advisor to set up a plan. But, just like your 401(k), this process is usually simplified when you use the 529 plan offered through your benefits package. Some employers will even hire a financial advisor or other company that offers services to help set up 529 plans.

Gradvisor, for example, offers employees personalized advice on selecting a college savings plan, which includes recommendations based on what they can afford to save and their risk tolerance. Employees have access to a dashboard where they can set and manage goals, and project future performance to gauge the likelihood that they will be able to pay for college one day. Since it's launch in 2015, Gradvisor has launched some marquee names like The Washington Post and GNC, and has partnered with Gusto, a leading HR payroll company.

An employer-sponsored 529 plan can also help boost your college fund. With automatic payroll deposits, employees can set up regular contributions to their 529 accounts and not have to worry about forgetting to make a deposit or worse, spending the money elsewhere. And some employers are also offering matching contributions, which is basically free money to help pay for your child's education.

Things to watch out for

Although in most cases it might be more convenient to just go with your employer's plan, you could be missing out on other potential benefits. Twenty-eight states, including the District of Columbia, currently offer a state tax credit or deduction for residents who use their home state's plan. Some states, including Maine and Nevada, also offer matching grants when a resident makes a contribution to their plan. You'll also want to review the investment options offered through your employer's plan to make sure it's the right fit for your family's needs.

And remember that one big difference between a 401(k) and a 529 plan is that 529 plans are funded with after-tax money. That means that if your employer does match your contributions you will have to pay income tax on the amount they contribute. You're still getting free money for college, but the amount of the match will count as income on your annual tax return. However, the recently introduced Boost Saving for College Act would allow employer matches up to $1,000 to be excluded from the employee's gross income, which would eliminate this issue for some families.

RELATED: Experts say this is how much you should save for college

401(k)s, health insurance, gym memberships, childcare services– these are just some of the perks commonly offered to employees working in the U.S. And as companies become more aware of the importance of financial wellness, some are also starting to help save for future college bills by offering 529 plans as a voluntary benefit. 529 plans allow families to put away money that will grow tax-free as long as it is eventually spent on qualified higher education expenses.

The idea is that employer-sponsored 529 plans will get more families to save for college just as 401(k) plans helped grow retirement savings. According to the Employee Benefit Research Institute, companies began offering 401(k) plans in 1982 and just 14 years later, total assets in the plans topped one trillion dollars. And just like retirement, most families will need to be prepared if they want their children to get a degree without going into massive debt. A 529 plan makes it easy to save - a parent with a newborn who makes monthly deposits of just $100 would have over $38,000 by the time the child is ready for college, assuming a 6 percent annual investment return. At today's prices, that amount would cover two years of tuition, fees and room and board at an in-state public school, according to the College Board.

Higher education is an essential part of a community's future prosperity and economic mobility, which is why some states are encouraging employers to offer 529 plans. Nevada and Illinois currently offer employers a tax credit for matching employee 529 plan contributions.

Employee incentives

Just about anyone can open a 529 plan, even if it's not offered through your employer. Most states offer a direct-sold plan, which you can sign up for online, or an advisor-sold plan, which has to be opened through a financial advisor. But sometimes there are compelling reasons to use the plan your company offers.

According to Savingforcollege.com's 2016 Annual College Savings Survey, 72 percent of families who wanted to open a 529 plan said they don't know the steps involved, and 36 percent said that they would enlist the help of a financial advisor to set up a plan. But, just like your 401(k), this process is usually simplified when you use the 529 plan offered through your benefits package. Some employers will even hire a financial advisor or other company that offers services to help set up 529 plans.

Gradvisor, for example, offers employees personalized advice on selecting a college savings plan, which includes recommendations based on what they can afford to save and their risk tolerance. Employees have access to a dashboard where they can set and manage goals, and project future performance to gauge the likelihood that they will be able to pay for college one day. Since it's launch in 2015, Gradvisor has launched some marquee names like The Washington Post and GNC, and has partnered with Gusto, a leading HR payroll company.

An employer-sponsored 529 plan can also help boost your college fund. With automatic payroll deposits, employees can set up regular contributions to their 529 accounts and not have to worry about forgetting to make a deposit or worse, spending the money elsewhere. And some employers are also offering matching contributions, which is basically free money to help pay for your child's education.

Things to watch out for

Although in most cases it might be more convenient to just go with your employer's plan, you could be missing out on other potential benefits. Twenty-eight states, including the District of Columbia, currently offer a state tax credit or deduction for residents who use their home state's plan. Some states, including Maine and Nevada, also offer matching grants when a resident makes a contribution to their plan. You'll also want to review the investment options offered through your employer's plan to make sure it's the right fit for your family's needs.

And remember that one big difference between a 401(k) and a 529 plan is that 529 plans are funded with after-tax money. That means that if your employer does match your contributions you will have to pay income tax on the amount they contribute. You're still getting free money for college, but the amount of the match will count as income on your annual tax return. However, the recently introduced Boost Saving for College Act would allow employer matches up to $1,000 to be excluded from the employee's gross income, which would eliminate this issue for some families.

RELATED: Experts say this is how much you should save for college

 

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