• Brenden Leese, CFP®

National 529 Day Should be All Year Round


Key Takeaways

  • 529s can be an excellent tax-advantaged savings vehicle, but they’re not the only game in town.

  • Whichever saving option(s) you choose, the earlier you start and the more consistently you make contributions, the better your long-term results will be.

  • Don’t forget, you can keep funding your college savings vehicles even after your child/grandchild moves into their freshman dorm. Your money has 4-plus years to accumulate.

May 29 is not just Memorial Day weekend and the official kickoff to summer. It marks 529 College Savings Day, a day to raise awareness about the value of planning and saving for higher education expenses. For many families, saving for college takes a back seat to buying a bigger home, making extensive renovations, and enjoying large family vacations. Even some of the successful, highly educated families we work with struggle with college saving options and tactics when they’re also trying to enjoy life in the present. First and foremost, tax-advantaged 529 college savings plans are not the only smart vehicle for saving for college. They have many advantages which I’ll discuss in a minute. But they’re not the only game in town. Many clients we work with are also utilizing UTMAs (or UGMAs) and in certain cases Roth IRAs – sometimes even a combination. Let’s take them one at a time:

1. 529s are good for tax-free growth and can be utilized for a wide variety of education expenses.

  • You can fund up to $16,000 per year (annual gift tax exclusion) in a 529 or up to $80,000 via a single 5-year lump-sum contribution.

  • You can save between $200,000 and $500,000 in a 529 account, depending on which state’s plan you choose.

  • Money grows tax-free and there is no tax owed when savings are used for qualified education expenses.

  • Many states, including New Jersey and Pennsylvania, provide a state income tax deduction for contributions made to your home state’s plan.

  • You can change beneficiaries. If the child you are saving for does not attend college, for example, you can allow your other children or future generations to utilize the funds.

  • You can now use up to $10,000 a year from your 529 account to pay for K-12 private school tuition.

  • Downside: You pay taxes plus penalties if funds are withdrawn for non-education needs.

2. UTMAs (Uniform Transfers to Minors Act) are good for passing savings on to a beneficiary once they reach the age of majority (18 or 21 depending on the state).

  • You can fund up to $16,000 per year (annual gift tax exclusion).

  • There is no maximum funding limit for UTMAs like there is for a 529.

  • You can invest however you like; there are no restrictions based on options as with a 529. An UTMA is similar to a conventional brokerage account.

  • Downsides: “Kiddie tax” i.e., not tax-free for education. Also, the money will belong to the child/beneficiary at the age of majority (18 or 21 depending on state). You can no longer control what they do with the money.


3. Roth IRAs can be very helpful for education planning purposes, especially for parents who waited until later in life to start having kids. Like a 529, there is no income tax deduction when you contribute to a Roth IRA. Instead, your contributions and earnings grow tax free. And because you’ve already paid your taxes, you can withdraw contributions at any time, for any reason, tax-free.

  • Once you reach age 59½ (assuming you’ve had the Roth for at least five years)  all of your withdrawals are tax free – including those used for college.

  • If you’re under 59½, withdrawals of earnings will be subject to income taxes -- but not an early withdrawal penalty -- as long as the cash is used for qualified education expenses.

  • Any money that you don’t end up spending on college can remain in the Roth to fund your own retirement.

  • Roth IRAs are not included in FAFSA asset calculations, so they won’t hurt your eligibility for financial aid.

  • Downside: You can only contribute up to $6,000 per year to a Roth (or $7,000 if over age 50).

Biggest mistakes we see people make when it comes to college saving

  1. Waiting too late to start saving for education.*

  2. Not understanding the tax benefits of a 529 or Roth IRA versus an UTMA.

  3. Not understanding the “glide path” – i.e., when to be in aggressive growth during the beneficiary’s early years and more conservative as they get close to college age.

  4. Not understanding the control they have when funding education with a 529 (or Roth) versus just saving money as they go along.

  5. Not saving consistently – monthly or quarterly -- to take advantage of dollar-cost averaging.

  6. They stop saving just because their child/grandchild has started college. In many cases, it can make sense to continue contributing to your child’s 529 account in their early years of college.

  7. You are not required to invest in your home state’s plan. We have recommended the state of Utah plan for many clients due to its low fees, excellent service and wide variety of investment options.

* Clients sometimes come to us needing help setting up college savings plans for a child who is eight to ten years old, even older. It’s not too late to get started, but you will have to make much larger regular contributions to your account to reach your funding goals than if you had started saving when your child was an infant. You may also have to adjust your expectations about the types of schools he or she can afford to attend. Contact me any time to discuss the above issues.

At Novi, we take education very seriously. We can run various college saving scenarios based on savings capacity/desires and help you fund the accounts appropriately – at no charge. We can also help you decide which vehicle makes the most sense for your situation. Again, we do not charge for assistance with 529s or other college savings vehicles, despite providing guidance.

If you or someone close to you has concerns about their college savings plans, please don’t hesitate to reach out. We have helped many clients in the same situation. For more about college savings strategies, see my post Are You Taking Full Advantage of Your 529 Plan?

 

BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners