As a parent or grandparent, what do you want for your children?

  • A better life
  • Happiness
  • More money
  • Status
  • Recognition

Probably all of these things, but how do you help them achieve their goals?  All of these goals, and more, start with a good education.  Catholic Education Arizona is the first starting point and where the foundation is built for your kids/grandkid’s future.

We’ve all heard how much a secondary education (college) costs and it seems as though every year it gets more and more expensive.  The question is, how can you help provide the education that your kids need to be successful in life?  Maybe we should define “successful”, but that is a whole different topic.  For now, let us assume that “success” is all the things listed above.

Depending upon the degree (Bachelor, Masters, Doctorate) or the field of study, the costs can be as high as several hundreds of thousands of dollars.  How is this affordable?  Options include student loans, financial aid, summer jobs, working during college and savings or a combination of these.

  • Student loans create debt that the student must pay back at some point. These are loans which are generally at a low interest rate but can plague the student and parents for years as they pay them back.
  • Financial aid can include grants and scholarships.
  • Summer jobs and working throughout the school year is an option too. However, is it realistic to work during normal school semesters and still have adequate time to study?
  • Saving for college. Saving can be done a couple of ways.  Let’s explore a 529 Plan.

What is a 529 plan?  This is a tax advantaged savings plan designed to encourage saving for future education costs.  They are legally known as “qualified tuition plans” and are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

There are two types of 529 plans: Prepaid Tuition Plans and Education Savings Plans.

Pros and Cons

The below tables show some of the pros and cons for each type of plan.

Prepaid Tuition Plan

Pros

  • Allows you to prepay future tuition costs through the purchase of “units” at today’s price of tuition.

  • Upon enrollment, your plan will be determined based on the current age of your child and the number of years of tuition you buy.

  • Some plans may guarantee an investment return which will cover future increases in tuition.

  • Your funds are pooled in a general fund which is managed by the plans’ money manager.

  • Generally, there is a flat fee charged at enrollment.

Cons

  • Many plans require you or your child to be a resident of the state that sponsors your plan.
  • If your child does not go to the college you selected, the plan may pay less than if they attended the college that was originally selected.
  • Even though the plan may guarantee an investment return, the plan may also allow for modifications to the benefits they pay out due to actuarial deficits.
  • You have no say or input into the investment strategy.
  • All tuition credits generally must be used by the time your child turns 30 and all withdrawals must be completed within 10 years from the time your child starts college.
  • Funds are typically designed to pay only for undergraduate tuition costs at in-state public colleges. Other expenses like room and board, books and graduate school may not be covered.
  • You might be assessed fees for late payments, returned checks, changing the beneficiary, document replacement or other administrative matters.

Education Savings Plan

Pros

  • You set up an investment account with pre-determined investment options and you can select the investment strategy (low risk, moderate risk, high risk).
  • You can roll over the funds from your existing savings plan to another 529 plan (savings plan or prepaid tuition plan) once per calendar year without penalty.
  • You can open a savings plan at any time of the year and generally it can remain open indefinitely.
  • You have more flexibility in paying education expenses. Funds can be used at any college in the US or abroad that is accredited by the Department of Education. This includes undergraduate colleges, graduate and professional schools, two-year colleges, technical and trade schools. Funds can also be used to pay K-12 tuition expenses.
  • Generally, no upfront flat fees are charged.

Cons

  • Many plans require you or your child to be a resident of the state that sponsors your plan.
  • If your child does not go to the college you selected, the plan may pay less than if they attended the college that was originally selected.
  • Even though the plan may guarantee an investment return, the plan may also allow for modifications to the benefits they pay out due to actuarial deficits.
  • You have no say or input into the investment strategy.
  • All tuition credits generally must be used by the time your child turns 30 and all withdrawals must be completed within 10 years from the time your child starts college.
  • Funds are typically designed to pay only for undergraduate tuition costs at in-state public colleges. Other expenses like room and board, books and graduate school may not be covered.
  • You might be assessed fees for late payments, returned checks, changing the beneficiary, document replacement or other administrative matters.

There are tax advantages to a 529 plan.  One of the benefits of 529 plans is the earnings grow tax-free provided they are used for qualified education expenses (tuition, room and board etc.).  The longer your money is invested, the more time it has to grow and the greater your tax benefits.  To qualify for the tax benefits, the funds must be used for qualified educational expenses.   Consult with your tax preparer to fully understand tax benefits that may apply to you.

How much can be contributed?

  • There are no annual contribution limits, however, contributions to a 529 plan are considered gifts for federal income tax purpose. In 2020, up to $15,000 per donor, per beneficiary qualified for the annual gift tax exclusion.  The IRS may change this limit in the future.
  • Based on the Tax Reform Act of 2017, parents and grandparents can exceed the annual gift tax exclusion amount by “super funding” up to 5 years of contributions in a single year (up to $75,000).

Both types of plans (prepaid tuition and education savings plans) may charge fees.  You should carefully review the plan’s offering circular to understand what fees are charged for the plan and each investment option.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer’s official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

Andy Phillips is a retired banker and currently is a Financial Representative with Benefit and Financial Strategies, LLC.

Andy Phillips offers products and services using the following business names:  Benefit and Financial Strategies – insurance and financial services; Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments.  AIC is not affiliated with Benefit and Financial Strategies or Catholic Education Arizona.

andy@benefitandfinancial.com

480.688.1011