529 plans: Not for kids only
With the economy in flux and more adults than ever heading back to school for retraining, you may want to consider setting up a 529 plan for yourself in addition to, or instead of, one for your young children.
Regardless of your age, you can set up a Section 529 plan for yourself to fund educational expenses now or in the future.
You can use the money in a 529 plan to upgrade your skills by just taking a few classes at a qualified college or trade school, or working towards a degree or advanced certificate. You can apply the funds for tuition, books, fees and even a computer, as long as it is used to further your studies.
Even if your plans fall apart, and you use the money for your own educational expenses, you can always change the beneficiary on your account to a child, grandchild or another member of the family without paying any tax on the transfer.
Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and all money that comes out of the fund for your educational expenses is tax-free upon withdrawal. What’s more, many states give upfront state tax deductions for 529 plan contributions.
‘It’s a tough economy, and retraining is something that more and more people are doing, whether it is something they want to do or not, and 529 plan funds can certainly help in that regard,’ says Ken Bower, a Certified Financial Planner with Moneta Group, a wealth management firm in St. Louis.
Setting up a 529 plan for yourself is no more complex than setting it up for a child or grandchild. The first step is to choose a state plan using the tools here at Savingforcollege.com.
Because so many states give a tax deduction for state residents, it makes sense to stay with your own state’s plan unless you have a compelling reason to go out of state. Open an account with yourself as both the account owner and the beneficiary. Generally you can do this with a small sum, such as $50 or $100.
Choosing an investment option can be a little trickier because the most commonly selected investment option — the age-based plan — isn’t suitable for an adult. That’s because age-based plans assume an 18-year time frame in which a child grows older towards college matriculation. Instead you’ll want to choose another option that is suitable for your timetable.
If you’re planning to return to school immediately, you’ll want to choose an option with no investment risk, such as a money market account. If you have at least five years to save and earn, you might want to select a balanced fund that invests in stocks or bonds, or pick a stock fund and a bond fund. When it comes to making contributions, you can either set up an automatic investment plan whereby you contribute a certain amount per month, or you could contribute occasionally when you have some extra cash.
Planning for future education
Whether your motivation is to fulfill a dream or out of necessity, setting up a 529 plan with an automatic investment of even $100 a month — if you have the luxury of time — can ease the financial sting of tuition bills once you are actually back in school. Not only is trade school or college tuition expensive and increasing all the time, but books can run $100 or more each and most schools assess application and registration fees as well.
If you’re planning to return to school within the next couple of years, you shouldn’t risk your funds in the stock market within your 529-plan account. Instead pick a bond fund, money market fund or stable value fund so that your money will be intact, plus a little bit of interest, when the time comes to pay your tuition bills. If you have more than five years before you plan to return to school, you could risk some of your savings in a stock mutual fund within the 529 plan, balanced with a bond fund or a money market fund.
While any investment return is welcome on 529 plan assets, the discipline of saving is important, too, because you are making a financial commitment to yourself to return to school. ‘When it is part of your midterm to long-term plan to go back to school, setting up a 529 plan absolutely makes sense,’ says Bower. ‘You are, in many cases, going to get a tax deduction for your contribution — depending on what state you live in — and will be able to take the money out tax-free for your education.’
If you’re out of work or have an immediate need for some retraining, there’s no time to save. But if you have some money to put towards that retraining effort, using a 529 plan can still make sense, Bower says.
‘In Missouri, dollars only have to be in an account for 10 business days before you remove them for a qualified educational expense,’ he says. ‘If you live in a state that gives a tax deduction and you have an account with your state’s plan, you get the tax deduction, which in Missouri is 6 percent. So it is simply a pass-through account.’
Before you employ this strategy, check with the state in which you plan to set up an account to determine the minimum time before you can remove the funds, to make sure you have enough time between depositing the funds and removing them to pay your educational expenses. For the money to be withdrawn tax-free you must incur qualified expenses, which include tuition, room and board, fees, and even a computer used to further your education at a qualified educational institution.
Even if you have not made a firm decision to return to school, it still may be worthwhile to set up a 529 plan for yourself and contribute some money, such as a bonus from work or a tax refund, to it now and then. It’s there if you need it and if you ultimately do not return to school, you can change the beneficiary in the future to your own children or another relative.
Also, if you do use it for your own qualified educational expenses, but you overfunded the account, you can change the beneficiary in the future, says Nicole Ramirez, a financial adviser with AXA Equitable in Dallas. ‘If you need to go back to school, you can set up a 529 plan for yourself and use some of the money for qualified expenses for higher education and then at a later date, if you have some money left, you can change the beneficiary to your child,’ she says.
Another reason an adult might want to set up a 529 plan is to get a jump on funding college for children that have not even been born. ‘When you’re young and have no children, maybe you live in a smaller house and have a small house payment or rent payment, you may have a little more disposable income to put away into a 529,’ Ramirez says. ‘When children come, your money tends to go into other places. So for a young couple who are planning on having children later on, it’s a great idea to fund a 529 in their own names with the thought of changing the beneficiary to the children once they come along.’
A good place to start