529 Plans Explained

529 College Saving plans are one of the most common family financial planning tools.  Parents feel obligated to create 529 College Saving plans as part of their financial planning. As a financial advisor, one of the most common questions I receive is “should I start saving for my children’s education?”.  The answer is maybe.  First, ask yourself what you are doing to prepare for your own retirement.  Are you maxing out every available retirement savings venue for yourself?  Until you are doing that, my answer will usually surprise my clients when I say “No, it’s not time for you start saving for college”.  Why?  Because there are lots of people that will help your child go to college.  They will have access to grants, scholarships and loans. As a parent, will also have access to loans for college.  Grandparents or other family members might be willing to help offset the cost of college tuition.  Your child can work part-time during college, and consider attending a community college for the first two years to save money.  All of that being said, NOBODY is going to help you retire.  Social Security (if it even exists when you are of eligible age) will be a paltry sum.

Take Care of Yourself First

Almost every retirement plan offered through employment is a “defined contribution” plan as opposed to a “defined benefit” plan.  This is the difference between a portfolio that grows only when you contribute to it, and a pension plan that is often offered through union jobs and municipal jobs.  If you have a typical “defined contribution” plan, your employer may “match” your contribution a modest amount. You are still responsible for the lion’s share of responsibility determining how much is contributed.  For the self employed, it is an even more complicated scenario. If you are contributing on your own to an IRA, Roth IRA, SEP or LIRP, as well as having yourself on your own payroll so you are paying into Social Security and Medicare.  As a business owner, you can often deduct many expenses in your life, leaving your net income reported to the IRS as low as possible.  In that case, you may qualify for financial aid for your child’s college education. (learn more about Retirement options here: https://investorsage.com/category/financial-planning/retirement/)

529 College Saving Plans are Flexible and Tax Advantaged

But I digress….if the answer to the first question is YES, than by all means start setting money aside in a 529 College Savings Plan.A 529 plan is a tax-advantaged method of saving for future college expenses that is authorized by Section 529 of the IRS. The plan allows an account holder to establish a college savings for a beneficiary and use the money to pay for tuition, room and board, mandatory fees and required books and computers. The money contributed to the account will then be invested in a diverse portfolio, the asset allocation of which will be determined by your child’s age and how long you have before they will be college age.  This portfolio will consist of stocks, bonds, ETF’s, REIT’s, mutual funds or in money market funds. The tax advantage of these accounts is that the earnings are not subject to federal tax (or state tax, in most cases) as long as the money is used only for qualified college expenses. The plans are open to both adults and children. Most 529 plans are sponsored by a specific mutual fund company, and mandate that you choose your invest selections from their lineup of proprietary mutual funds.

Purchasing a 529 College Saving Plan

As with every financial product, don’t sign anything until you understand the fees, both up front and ongoing.  What are the annual fees for the 529 plan administration?  Are the mutual funds available A Share, B share or C share?  If you purchase the plan through a financial advisor, do they make commission every month on your contribution (the answer is likely yes).  College saving plans do not require a financial advisor.  Because the asset allocation models are so standardized based on your child’s age, going directly with a mutual fund company (such as American Funds or Fidelity), cuts out the middle man and thus increases your return.

Advantages of 529 College Saving Plan

One of the great advantages of 529 plans is that the assets do not need to be used solely for the beneficiary named on the account.  If one of your children decides to become a surgeon, and the other a fire fighter, they will have very different higher education costs.  If there is an excess in one account, it can be applied to any immediate family member, as long as the money is used for higher education.  The other great flexibility in these plans is that these funds are not solely designated for universities. The money can be used for any accredited post-secondary program, which may include massage school, culinary school, EMT training and more.

The Greatest Gift You Can Give Your Children Is Your Own Financial Security

The greatest gift you can give your children is your own financial security.  Take care of your own retirement planning, life insurance needs and debt reduction before contributing to your child’s college savings plan.  If you have excess funds, 529 College Saving Plans are a tax-efficient, flexible tool in helping to prepare for the cost of your child or grandchild’s education.  If you do start a 529 college saving plan, talk to your children about it.  Statistics show that children that are involved in the investing of their 529 college saving plan are much more likely to go to college.