By Theresa Cagle Fry, Senior Vice President and Manager of IRA’s, Retirement & Education PlanningPrint This Post
Many of us organize our lives using a calendar. Calendars can tell us what we need to do and when we need to do it. Dates on the calendar can also be a reminder of special days, such as birthdays, anniversaries, celebrations, and holidays. Although May 29 is not an official holiday, for financial planning it’s a reminder of the importance of saving for a student’s education needs.
Why 5/29? The answer is because 529 education savings plans offer a unique way of saving for education in a tax-advantaged manner. These accounts are named after the Internal Revenue Code – Section 529 – that created them and their tax advantages. A 529 education savings plan may not be familiar to everyone, but they can be an excellent way to provide income tax-free benefits for qualified education expenses – regardless of whether the savings need is for elementary, high school, or post-secondary college, university, trade school, or apprenticeship programs.
For the 2021-2022 academic year, the total cost for attending a four-year public out-of-state college or university was $44,150 and $27,330 for an in-state, four-year public school. This includes tuition and fees, room and board, books and supplies, transportation, and other expenses.1 Although most college-bound undergraduate students receive some form of financial aid, a little over one-third of that financial aid comes in the form of loans. Only a few very talented students receive “full-ride” scholarships. And even that term is misleading. Although they typically cover tuition and fees, and room and board, a “full-ride” scholarship does not generally cover other college costs.
Even with all these sources of financial aid, scholarships, grants and loans are not usually enough. In 2021, the largest portion of college costs were paid through parent income and savings (45%). The remainder of the expenses were paid by:
- Scholarships and grants (25%)
- Money borrowed by students (11%)
- Money borrowed by parents (9%)
- Student income and savings (8%)
- Relatives and friends (2%)2
A 529 plan provides tax-free qualified distributions for a variety of post-secondary expenses such as tuition and fees, room and board, and books and supplies. But 529 plans are no longer just college savings plans. They can also be used income tax free for program expenses for registered apprenticeship programs, repayment of up to $10,000 in outstanding student loans for the student or siblings of the student, and K-12 tuition (up to $10,000 a year).
Contributions to a 529 plan are not tax deductible on your federal income tax return but may be eligible for state tax deductions or credits. Investment alternatives vary from state to state, and investment changes can only be made twice per year. Contributions are gifts, which means they are subject to the annual $16,000 gift limit, and married couples can contribute $32,000 to the same student. However, special five-year advanced gifting is available to make one large gift ($80,000 per individual or $160,000 for a married couple) instead of five smaller ones. If you use the five-year advance gifting strategy, you can’t make other gifts to the beneficiary for five years.
There are several ways to save for a child or grandchild’s education. However, the tax advantages and flexibility of a 529 savings plan merit giving it a closer look. If you haven’t taken the time to create a plan for how to pay for your loved one’s education, contact a financial advisor today for more information about 529 plans.
Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.