One of my greatest accomplishments in life was attending the University of Notre Dame. Thanks to hard work and dedication, I not only earned my undergraduate degree, but also my Master’s of Science in Finance. My time at Notre Dame was life changing and something I am beyond grateful for. As Lou Holtz said, “Those who know Notre Dame, no explanation’s necessary. Those who don’t, no explanation will suffice.”
As with anything worth having in life, it comes at a cost. Education is extremely expensive and only getting more expensive each year. Look at the cost of tuition/room and board at a few of the most coveted Universities in the United States:
· Harvard University - ~$83,538 (per year)
· Yale University - ~$85,120 (per year)
· Stanford University - ~$82,162 (per year)
· Princeton University - ~$80,415 (per year)
· University of Notre Dame - ~$80,211 (per year)
In this blog, we are going to break down:
Planning for education costs
The tax implications opening an education plan
What qualifies as an education expense for a 529 plan
The benefits to starting an education plan even if your child decides not plan to attend.
Let me introduce you to a 529 plan, a short and more efficient way of saying 'a tax-advantaged savings plan designed to help pay for education.'
Let's break it down further.
The 529 Plan
There are two major types of 529 plans:
1) An Education Savings Plan – This plan allows an individual to contribute money into an investable account, growing TAX FREE, to be used for qualified expenses including tuition, fees, room and board, and other related costs. More importantly, this plan allows for education benefits for those K-12.
2) A Prepaid Tuition Plan – Although less common, this plan varies in specifics, but allows an individual to lock in tuition at the current rate for a student who will not be attending college in the near future. Keep in mind, these plans are not available for K-12 education like the 529 plan.
Tax Benefits
Opening 529 accounts is helpful for future education expenses, but understanding the tax advantages 529 plans offer is another crucial reason to incorporate into your financial plan.
Here are a few:
1) Contributions can be tax-deductible at the state level
2) Earnings can grow tax free if used for qualified expenses (more on this later)
3) Some states even offer matching grants or other incentives
Qualified Expenses
As mentioned before, earnings can grow tax free, but only if used for qualified education expenses.
Those expenses include:
Tuition
Fees
Books
Supplies
Room & Board Costs
No College - No Problem
So your son or daughter has decided they don't want to go to college...this is where the 529 plan is a no brainer. Despite the 529 education plan not being used for its original purpose, you have several options when using these funds including:
1) Keeping the Funds for Future Education: This gives the recipient the flexibility if still interested in pursuing further education
2) Changing the Beneficiary of the Plan: If the original beneficiary decides not to pursue education (or has leftover funds), you can change the beneficiary to another eligible family member without incurring taxes or penalties
-Eligible family members include siblings, parents, grandparents, aunts, uncles and first cousins
3) Using the Funds for Other Qualified Expenses: If the funds are not used by the beneficiary, you still have the ability to use the funds for additional qualified expenses including tuition for elementary or secondary public, private or religious schools and other apprenticeship programs
4) Roll 529 Plan to A Roth IRA in Beneficiaries Name: With the latest news coming out of the Secure 2.0 Act, 529 plan account owners can roll over 529 funds into a beneficiary-owned Roth IRA owned tax-free. The cap on this rollover is $35,000.
It is clear these investment vehicles offer invaluable benefits for those saving for education. From tax advantages to flexibility in fund usage, 529 plans provide families with numerous tools to prepare for the future.
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Education costs are only increasing. As a parent with children, there will always be the incentive to prepare our kids for future success and there is no better way than setting aside funds for them to pursue their educational dreams.
Understanding the nuances of education planning requires time and effort. Our goal at Moment Private Wealth is to help you navigate the complexities that come with savings such as those for future education. We have the team to help you implement educations savings into your financial plan so your children can use their gifts to be a force for good in the world.
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