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4 times millennial parents should consider a 529 plan
http://www.savingforcollege.com/articles/4-times-millennial-parents-should-consider-a-529-plan

Posted: 2018-01-17

by Kathryn Flynn

In today's world, where the price of a bachelor's degree can rival that of a single-family home, having a 529 college savings plan can offer young parents peace of mind. It's easy to enroll, either on your own or through a financial advisor, and once you're signed up you can set up automatic contributions to fund the account. Your investment grows tax-free, and won't be taxed when you withdraw, as long as the money is used to pay for qualified education expenses, which, as of January 1, 2018 includes tuition for private elementary and high school. And one of the best parts about a 529 plan is that everyone is eligible – there are no income limits or age limits. You can start a plan with as little as $25, and, in some cases contribute as much as $500,000 over the life of the account.

But should all young parents have a 529 plan? If you're still struggling to make your student loan repayments or you're not saving adequately for retirement the answer is probably no. However, there are times when it really does make sense.

1. You're currently an independent student and your state offers a 529 plan tax benefit.

If you're still in school and working, you might want to consider funneling your expenses through a college savings plan. Since you have such a short time horizon, you won't be able to take full advantage of the tax-free compounding, but you might be able to save on your state taxes. Currently, over 30 states, including D.C., offer a tax deduction or credit for 529 plan contributions. For example, if you live in Wisconsin and open a Wisconsin 529 plan, contributions up to $3,140 per tax year can be deducted from your state taxable income.

But remember, if you're taking the Lifetime Learning credit there is no double-dipping. That means the costs of tuition and fees that were used to generate the credit won't be considered qualified 529 plan expenses. Be careful to avoid non-qualified distributions – the earnings portion may be subject to federal and state tax as well as a 10% penalty.

2. You're saving for graduate school.

Loans for graduate and professional degrees make up about 40% of the country's $1 trillion student debt balance, and they just got more expensive. On July 1, 2017, interest rates for graduate students rose to 6%, up from 5.31% in the previous year. Interest rates for PLUS loans are now 7%, up from 6.31%. As a young parent, high student loan payments can hinder your ability to save for things like a first home, and could delay longer-term goals like saving for retirement.

If you're serious about pursuing an advanced degree, one of the smartest things you can do is to open a 529 account. The sooner you start making contributions, the more time you'll have to take advantage of tax-free compounding and reduce the amount you'll have to borrow.

3. You want to give a financial gift to a niece, nephew or other child.

Instead of spending $50 on a toy every birthday and holiday, why not put that money toward the child's college fund? In 18 years, he or she would have over $3,200 to spend on college, assuming a 6% annual investment return. As the 529 plan owner, you can also claim any available state tax benefits, and you retain complete control throughout the life of the account.

Just remember to consult the child's parent or guardian before you take a withdrawal. Any money received from someone other than a parent will be considered student income on the Free Application for Federal Student Aid (FASFA) and could reduce the amount of financial aid they're eligible for, so you'll want to be careful about your timing.

4. Your retirement savings are on track, and you want to save for your own child's future education.

A recent T. Rowe Price study showed that Millennial parents feel it's more important to save for their children's education than to plan for their own retirement. Most financial planners would wholeheartedly disagree with this, mainly because you can always borrow to pay for college, but there are no “retirement loans”. But instead of relying on student loans as a back-up plan, a better idea is to try and save for both.

If you and/or your spouse have a 401k, start by contributing at least as much as your employers' match. This is the easiest way to grow a retirement fund, since the money is taken straight from your paycheck. Next, if eligible, you can each contribute $5,500 to a Roth IRA. With a Roth, you can withdraw your contributions at any time without penalty, and when you turn 59 ½ you qualify for federal tax-free distributions, including earnings, as long as you've had the account for at least five years. What's more, the early distribution penalty is waived if the funds are being used to pay for higher education expenses.

Once you have your retirement plans in place, you can start planning a college savings strategy. As a young parent, it might be tough to come up with extra room in your budget, but remember that a 529 plan doesn't require a monthly commitment. Start by saving what you can, when you can. The most important thing is to open your account. You can make contributions at your own convenience, and even ask for help. Many parents are funding their 529 plans through crowdsourcing - asking friends and family for gift contributions in lieu of traditional holiday and birthday gifts.

RELATED: What you can pay for with a 529 plan

This post was originally published on Forbes.com

In today's world, where the price of a bachelor's degree can rival that of a single-family home, having a 529 college savings plan can offer young parents peace of mind. It's easy to enroll, either on your own or through a financial advisor, and once you're signed up you can set up automatic contributions to fund the account. Your investment grows tax-free, and won't be taxed when you withdraw, as long as the money is used to pay for qualified education expenses, which, as of January 1, 2018 includes tuition for private elementary and high school. And one of the best parts about a 529 plan is that everyone is eligible – there are no income limits or age limits. You can start a plan with as little as $25, and, in some cases contribute as much as $500,000 over the life of the account.

But should all young parents have a 529 plan? If you're still struggling to make your student loan repayments or you're not saving adequately for retirement the answer is probably no. However, there are times when it really does make sense.

1. You're currently an independent student and your state offers a 529 plan tax benefit.

If you're still in school and working, you might want to consider funneling your expenses through a college savings plan. Since you have such a short time horizon, you won't be able to take full advantage of the tax-free compounding, but you might be able to save on your state taxes. Currently, over 30 states, including D.C., offer a tax deduction or credit for 529 plan contributions. For example, if you live in Wisconsin and open a Wisconsin 529 plan, contributions up to $3,140 per tax year can be deducted from your state taxable income.

But remember, if you're taking the Lifetime Learning credit there is no double-dipping. That means the costs of tuition and fees that were used to generate the credit won't be considered qualified 529 plan expenses. Be careful to avoid non-qualified distributions – the earnings portion may be subject to federal and state tax as well as a 10% penalty.

2. You're saving for graduate school.

Loans for graduate and professional degrees make up about 40% of the country's $1 trillion student debt balance, and they just got more expensive. On July 1, 2017, interest rates for graduate students rose to 6%, up from 5.31% in the previous year. Interest rates for PLUS loans are now 7%, up from 6.31%. As a young parent, high student loan payments can hinder your ability to save for things like a first home, and could delay longer-term goals like saving for retirement.

If you're serious about pursuing an advanced degree, one of the smartest things you can do is to open a 529 account. The sooner you start making contributions, the more time you'll have to take advantage of tax-free compounding and reduce the amount you'll have to borrow.

3. You want to give a financial gift to a niece, nephew or other child.

Instead of spending $50 on a toy every birthday and holiday, why not put that money toward the child's college fund? In 18 years, he or she would have over $3,200 to spend on college, assuming a 6% annual investment return. As the 529 plan owner, you can also claim any available state tax benefits, and you retain complete control throughout the life of the account.

Just remember to consult the child's parent or guardian before you take a withdrawal. Any money received from someone other than a parent will be considered student income on the Free Application for Federal Student Aid (FASFA) and could reduce the amount of financial aid they're eligible for, so you'll want to be careful about your timing.

4. Your retirement savings are on track, and you want to save for your own child's future education.

A recent T. Rowe Price study showed that Millennial parents feel it's more important to save for their children's education than to plan for their own retirement. Most financial planners would wholeheartedly disagree with this, mainly because you can always borrow to pay for college, but there are no “retirement loans”. But instead of relying on student loans as a back-up plan, a better idea is to try and save for both.

If you and/or your spouse have a 401k, start by contributing at least as much as your employers' match. This is the easiest way to grow a retirement fund, since the money is taken straight from your paycheck. Next, if eligible, you can each contribute $5,500 to a Roth IRA. With a Roth, you can withdraw your contributions at any time without penalty, and when you turn 59 ½ you qualify for federal tax-free distributions, including earnings, as long as you've had the account for at least five years. What's more, the early distribution penalty is waived if the funds are being used to pay for higher education expenses.

Once you have your retirement plans in place, you can start planning a college savings strategy. As a young parent, it might be tough to come up with extra room in your budget, but remember that a 529 plan doesn't require a monthly commitment. Start by saving what you can, when you can. The most important thing is to open your account. You can make contributions at your own convenience, and even ask for help. Many parents are funding their 529 plans through crowdsourcing - asking friends and family for gift contributions in lieu of traditional holiday and birthday gifts.

RELATED: What you can pay for with a 529 plan

This post was originally published on Forbes.com

 

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