A college education is one of the best investments you can make for your child’s future. But the high cost of college may alarm you — especially if you’ve waited too long to begin saving. According to the College Board, the average cost of tuition and fees for the 2016-2017 school year was $33,480 at private colleges, $9,650 for state residents at public colleges, and $24,930 for out-of-state residents attending public universities.
529 plans are one of the most popular tax-advantaged college savings options. With 529 plans, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses. States may also offer their own tax advantages.
529 plans allow individuals to invest in a predetermined pool of stock and bond investments. Most plans will require you to divide your investment according to a given asset allocation determined by your child’s age. In general, the asset allocation will be more aggressive for younger children and less aggressive for children nearing college age.
Once your child reaches college age, the account owner may withdraw money from the account to pay for qualified higher education expenses. Assuming that you have followed the plan’s rules, there will be no penalties (nonqualified withdrawals will be subject to a 10% additional federal tax in addition to ordinary income taxes). And qualified withdrawals are tax free. If there is money left over in the account, the beneficiary designation can be changed to a sibling, first cousin or other family member (as defined by the Internal Revenue Code) of the original beneficiary without triggering gift taxes. Always consult with a tax professional for tax related issues.
For more information about college savings plans, contact us at 800-382-0564 or find an Investment Consultant near you.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuers official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.