529 plans were created as a way to save for future college education costs. There are various considerations when evaluating which 529 plan best suites your needs. One option allows for selecting a prepaid tuition plan that locks in today’s college tuition costs. You select the number of years you would like to “lock in” today before your student arrives on campus years from now. This can be helpful but can limit where your student goes to college and only addresses a portion of the total education cost. Other expenses like on (or off) campus housing, meal plan options, technology and learning material, and other miscellaneous expenses need to be considered.
Another option is to create a 529 savings plan. These plans allow you to pay for tuition and other education costs while not limiting your student to a particular college or state. They operate by directing your contributions into an investment account for future use. Your contributions go, in after tax, and the account can grow on a tax-deferred basis. Distributions are typically tax-free when applied to qualified expenses. Investment choices consist of active and passively managed portfolios and time waited portfolios that automatically adjust as the student gets closer to high school graduation.
Considerations when utilizing a 529 savings plan for current or future children or grandchildren:
- Reflection: What was your education experience like? Was it out of state, in state, or private? How did you pay for it? All experiences are unique and influence what options you may want to provide to those you care about.
- Costs: College is expensive, how much would you like to be available and when is it necessary?
- Timing: When do you plan to use the 529 savings plan? It’s now possible to utilize a 529 for private school tuition, prior to entering college. How does the first use of money impact your decision? How does a gap year impact timing? Will you plan to use the account at age 18 to fund all four years or defer to utilizing the account until junior year? Will any account values be left over for post graduate education choices?
- Investment selection: Based on how you answered the above question concerning timing will impact your selection of college savings plans. Keep in mind that the cost of education is continually rising. How can this rising cost be addressed by your investment choices?
- Taxes: Some plans offer a participant’s a state income tax deduction for their contributions each year. Distributions from 529 savings plans are tax-free when applied to qualified education costs.
- Gifting: Even if you are not a parent or grandparent yet, you can create an account now and begin contributing to get a head start. 529 savings plans allow you to designate the beneficiary at the time you open the account but allows for changes to be made later. This may also serve as a foundation to your estate planning or financial legacy.
- Planning: How is a 529 savings plan strengthened when coupled with an after-tax investment account? This investment account offers the ability to cover other expenses and to be repurposed to other planning needs as you, and your beneficiaries, move through different stages of life.