Your state may offer special breaks that will help you put more cash away for tuition.
Originally posted by: www.consumerreports.org
Most people know that May 29 is Memorial Day this year. But for parents of college-bound kids, there’s another reason to circle May 29 on your calendar. It’s also 529 College Savings Day, aka 529 Day.
No, you won’t find restaurants selling special drinks to celebrate the occasion. But 529 Day is a great time to review your college savings progress. Plus, your state plan may be offering deals and incentives for contributions, such as awards for newborns or matching grants.
“If you aren’t putting money in a 529 plan for your kids, you should get started right away,” says Mark Kantrowitz, a financial aid expert and vice president of Cappex, a college information website. “It’s absolutely the most-tax-advantaged way to save for college.”
Nearly every state offers a 529 plan, and some offer more than one. Even so, these accounts are a relatively underused savings option. Among families with college-bound kids, only 68 percent are putting away money towards that goal in any type of savings plan, while only 32 percent are using a 529 plan, says Paul Curley, director of college savings at Strategic Insight, a financial research firm.
One reason that so few parents use 529s is that only 41 percent know what 529s are and how they work, according to Strategic Insight. To help you get started, here's a quick intro to 529s:
Key 529 Advantages
Major Tax Breaks
Money in a 529 plan can be withdrawn free of federal and state taxes as long as it’s used for qualified higher-education expenses. These costs can include tuition, fees, books, computers, and services for special-needs students. (For more details, see IRS Form 970.)
State tax breaks may sweeten the deal if your state offers one. (More than 30 do.) But the value of these deductions varies. Rhode Island allows deductions of up to $500 per beneficiary per year for single filers ($1,000 for married couples filing jointly); Oklahoma offers up to a $10,000 deduction on contributions for singles ($20,000 for a married couple filing jointly).
What if your child doesn't need the money or doesn't go to college? You can change the beneficiary to a sibling or other family member or even yourself. Or you can simply withdraw the money, which will be taxed at the beneficiary’s rate, and you’ll pay a 10 percent penalty on earnings growth.
Favorable Financial Aid Treatment
If the 529 account is owned by a parent or a dependent student, only a maximum 5.64 percent of the assets will be counted toward the expected family contribution under the federal aid formula. And distributions will not be counted at all for financial aid purposes.
If the account is owned by grandparents or someone else, however, assets aren’t counted against aid eligibility. But distributions will be considered as student income and assessed at a 50 percent rate.
Either way, these savings are hugely valuable because almost 40 percent of federal financial aid comes in the form of loans, which must be repaid with interest. “Each dollar saved in a 529 can save $2 in future student debt,” Kantrowitz says.
Ease of Investing
Much like 401(k) retirement plans, 529s let you automatically invest in your choice of stock and bond funds. A popular option is an all-in-one age-based fund, which gives you a well-diversified portfolio that shifts to safer fixed-income assets as your child nears high school graduation.
Choosing a Plan
You don’t have to save in your own state’s plan—most 529s are open nationwide. But it’s worth checking out your home state offerings first because you may get a significant deduction on your contributions.
When comparing plans, look closely at the fees because low costs will allow you to keep more of your returns. The bargains are typically found among 529s that favor low-cost index funds, such as Ohio’s College Advantage plan, with fees on age-based funds of 0.04 to 0.11 percent, and Utah’s Educational Savings Plan, 0.020 to 0.037 percent. (To compare 529 plans, go to savingforcollege.com.)
It’s never too early to start investing in your child’s future, both financially and in overall safety. If you have not already, order your no-cost McGruff Safe Kit today, so you too can be prepared: