Investing in Education? Here’s How
Although it’s tempting to think the purchase of a home for your family is the biggest investment you’ll ever make. In most cases, it’s not.
The Number One investment will be your children’s education. For a baby born today, four-year tuition at a private college will be more than $500,000. Multiply that by the number of kids in your family and it will dwarf whatever most homes cost.
The good news is that in many cases financial assistance will be available, especially if the students have good academic records. In addition, student loans can help fill in the shortfalls.
Even so, the parents or grandparents will still have to bear a substantial part of the cost. That’s where 529 plans come in.
A 529 plan is a tax-advantaged plan to encourage savings for future education costs. There are two types: prepaid tuition plans and education savings plans. Every state has at least one type of 529. Education savings plans are the most common.
The funds in a 529 can be used for future qualified higher education costs, which include tuition and mandatory fees as well as room and board. That includes textbooks that are required reading and computers if they are used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.
What are the limits on annual contributions?
For parents or grandparents (as well as other family members and friends), the annual limit is $15,000 per individual or $30,000 per couple.
What are the maximum contributions allowed?
California has the highest maximum, at $529,000, followed by New York and South Caroline at $520,000. Georgia and Mississippi have the lowest maximums: $235,000. Any contributions made to these accounts above the limits will be returned to the donor.
Are contributions tax-deductible?
Over 30 states offer a state income tax deduction or tax credit for 529 plan contributions, but usually taxpayers must contribute to their home state’s 529 plan to qualify. Seven states offer a state income tax benefit for contributions to any 529 plan.
Which are the best 529 plans?
The similarities of 529 plans exceed the significant differences. If we compare them on the basis of tax benefits and costs involved, however, New York, Ohio, Illinois, and Massachusetts are among the most attractive. You are not limited to your home state’s plan.
What if the beneficiary doesn’t go to college?
There are several options. Change the beneficiary to another family member. Use the funds for apprenticeships. Pay off student loan debt. Put the funds toward K-12 education. You can spend up to $10,000 on tuition expenses for elementary, middle or high school.
N. Russell Wayne, CFP®
Sound Asset Management Inc.
Weston, CT 06883
Any questions? Please contact me at email@example.com