Put a 529 Plan on Your Back-to-School Shopping List

This post was written by Dawn Brown, CFP®, senior financial advisor with Altfest Personal Wealth Management. For more about the author, read her bio at the end of this post. 

Summer is the time for camps, summer reading lists, and taking that well-deserved vacation. As the time to go back to school approaches, we’re reminded that our children will be one step closer to college as they move up a grade in school. With college on the horizon, it is wise to start now to think of how we will pay for those ever-increasing education costs.

A good choice for college savings is a 529 plan. These plans allow you to save for qualified college expenses federal tax free. Each state has its own 529 plan; you can choose to invest in any of them, even in the plan of a state you don’t reside in.

It is best to do some research, starting with the plan your own state offers, to help you decide which plan to open. You can research your options using websites such as www.savingforcollege.com and www.morningstar.com.

Some factors to consider when opening a plan are investment choices, fees charged by the plan, and the amount you will contribute to the plan. Once you have chosen a plan, you can open an account online or request that the application be mailed to you.

You should choose to invest in a diversified portfolio of investments and review the investments periodically. Most plans have an age-based investment option which becomes more conservative as your child moves closer to starting college. They also offer a selection of mutual funds to select from for your account.

Here are some benefits to opening a 529 plan:

Tax incentive — Some states provide a tax deduction for contributions to your home state plan. States providing a tax deduction include New York, Georgia, and Louisiana. For example, in New York you can deduct up to $5,000 ($10,000 for a married couple filing a joint tax return) for your contribution, per year, on your state tax return.

Financial aid — Though 529 plans are for students they are considered a parental asset (rather than your child’s asset) when financial aid is being considered. This more favorable treatment results in up to 5.64% of the assets in a 529 account being available to pay for college, as opposed to 20% of assets held directly in the student’s name. Your child may receive more financial aid if fewer assets are in his or her name.

Gift tax treatment — 529 plans have a special gift tax treatment. The federal annual gift exclusion allows a $14,000 gift. In 529 plans, five years of gifts can be contributed in one year for a student beneficiary. Therefore, $70,000 (5 x $14,000) can be contributed in one year, resulting in a larger sum of money growing for college for a longer period of time.

Owner control — The account owner of a 529 plan (the parent or grandparent) has control over the account.

The earlier you start to save for college, the longer you have the money compounding. Opening a 529 plan should be added to your back-to-school shopping list.

BE Smart contributor Dawn Brown is a senior financial advisor at Altfest and has been helping clients with their retirement planning and other financial planning questions since joining the firm in 2002. She brings to her work a deep understanding of IRAs and qualified retirement plans, as well as college planning. She is a native of Birmingham, England and was educated in the UK and in the States.