529 Plan, What is that?

In 1996 the Small Business Job Protection Act created 529 Plans, also known as “qualified tuition plans”. This account which allows taxpayers a tax-advantaged way to save for education expenses for a designated beneficiary, after 24 years, might be the account that most know nothing about.

According to a recent survey by Edward Jones, 67% (a 5% increase since 2012) of Americans do not recognize a 529 plan as an educational savings tool. Almost half, 48% of those who did recognize the 529 plan as an education savings vehicle were unaware that it could be used to pay for K-12 tuition expenses. College savings is an area that needs more investor education. This could certainly help alleviate the debt obligations of our students going forward and it is clear that current student debt is a burgeoning problem.

When you think about the enormous costs of sending your children to school, which according to the College Board is $49870 for the average private four-year school, you would think that more people would be using all tools available to them to save for college. The 529 savings account can be an excellent tool to begin to save for this lofty expense. The monies saved for your respective beneficiary grows tax-free as long as you use it for higher education. 

The Tax Cuts & Jobs Act of 2017 added provisions that may allow you to also use these funds for K-12 expenses. The additional benefit of using these funds for K-12 could be another benefit if you have plans to send your children to a private school in the future. Keep in mind, some of the 529 plan benefits may be lost in certain states. In New York, for example, the state benefits received will be recaptured if the proceeds are used for K-12 and it will be considered a nonqualified withdrawal. You will want to check with your state, as your 529 plan may not follow the new tax law.

There is a struggle for most people to balance saving for college and for retirement at the same time. This is a fine balance that needs the attention of proper planning. Although you will not be able to borrow money for retirement, you will be able to do so for college, and you will want to have a plan in place to address both. Not having money in place for your children’s education may have an impact on your retirement down the road, but at the same time, overfunding your college savings at the expense of your retirement accounts will do the same.

The key here is to have a strategy in place that will allow you to save for both. Just like we advise clients to start saving for retirement early, it works the same way for education too. The more money you save for college early on, the less money you will have to add later on because you will benefit from the concept of compounding.

Think about it; if you start working after leaving school and start funding your retirement right away, you will be in a position to lower your retirement contributions when you have children and be able to start allocating the difference to their college funds. Depending on how many children you have and what your goals are for supporting their education, you may be able to shift this strategy back by the time your child is ten years old. Getting caught with a child at the age of eighteen and having nothing allocated for college education will, in most cases, place a strain on your financial situation.

529 plans can be a vital tool in your education funding savings strategy. I think it is disheartening that this tool is not well known and very much underused. It is vital to engage a fiduciary advisor as early on in your life as you can. This relationship will provide you with an advisor that can be in a position to guide you, advise you, and see you through the planning of your life to make sure you are financially prepared for all of the events ahead of you. This will be a relationship that will guide you through the financial ups and downs of the lives of you and your family. The goal is to make sure you are aware of the options that exist and the best ways available for you and your family to save for your financial futures.

Mitlin Financial assists our clients in addressing their college funding needs. We are here to help you instill these concepts within your own family.

Feel free to contact us, Mitlin Financial at:

?? (844) 4-MITLIN x112

or

?? [email protected]

if you or someone in your family needs assistance in getting started on their plan today.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.