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It’s 529 Day – Do You Know Where Your Child’s College Savings Are?

Happy 529 Day!  On May 29, the college savings industry celebrates the day as a way to spread the word about the positive benefits of saving for college with a 529 account.  Although these plans have been around for decades, they still exist in relative obscurity.  The investment research firm Morningstar estimates that only 16% of parents with children younger than college age are saving in a 529.

What is a 529 plan?

A 529 plan is a tax-advantaged investment plan made to help a family save for a beneficiary’s future higher education expenses.  Money is deposited after taxes in 529 plans, grows tax-free, and is tax-free upon withdrawal when used for eligible college costs, such as tuition and housing. A comparable investment in a taxable account would lose returns to annual income taxes and get hit with capital gains tax on withdrawal.  529 plans have no income limits, no age limits, and no annual contribution limits.  To further sweeten the pot, since January 1, 2018, the benefits of a 529 go beyond college.   Families can withdraw up to $10,000  to pay for tuition expenses for private, public, or religious elementary and secondary schools, tax-free, per year, per beneficiary.  

Most states offer tax incentives for 529 plans as well.  Ohio offers a tax deduction of $4,000 per beneficiary per year, with unlimited carryforward of excess contributions.  However, you don’t have  to invest in Ohio’s plan; be sure to compare 529 plans and select the one that’s best for you.  An HCM Wealth Advisor would be happy to assist you in this task.  

Additionally, there are other benefits to a 529 compared to a similar saving vehicle.  You, as the owner, stay in control of the investment, ensuring the fund will be used for its intended purpose.  This is different from a custodial account, where the money becomes the child’s once they reach legal age.  

Should you use one?

It’s no secret that a college education is simultaneously a good investment and a very expensive one.   According to the U.S. Census Bureau, four-year college graduates earn an average of $1 million more than high school graduates during their careers.  Over the last 30 years, costs at four-year public institutions rose by 225%, after adjusting for inflation.  As federal college assistance has shifted from student grants to guaranteed student loans, student debt has ballooned.  The average debt of graduates of four-year colleges was approximately $29,000 in 2017; meanwhile, the average size of a 529 account continues to grow, reaching $24,057 in 2017.  A 529 plan is a tax-efficient way to pay for college, allowing a student to start off in the world with less debt and fewer obligations.       

Happy 529 day!  May your college savings be diversified and tax-efficient.  

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