How do I save for my kid’s future college expenses?
As Advisors, this is a common question that clients have for us. There are many ways to save for your child's future including 529s, ESAs, and UTMAs. For the purpose of this article, we will discuss what a 529 is as well as the advantages and disadvantages of using it to save for college expenses.
A 529 is a tax-advantaged savings plan which means the interest that is accumulated within the account grows tax-deferred and no income taxes are paid on the growth if the money is used for qualified educational expenses (please see below for a list of qualified expenses). The other tax advantage of this account is that the person responsible for funding the account may receive a deduction from their state taxes.
When the 529 was originally developed, it was for higher education only. This definition has since expanded and can now go towards K-12 schooling along with apprenticeship programs.
The benefit of using a 529 to pay for grades K-12
If you live in a state that offers a state deduction, you can fund the 529, get the tax deduction, and use those funds to pay for your child's private school tuition. If we were to take Ohio for example, Ohio allows an individual to deduct $4,000 per beneficiary per year. If you had two children and maximized the contributions that would be $8,000 you can deduct from your state income taxes. Ohio’s state income tax ranges from 2.765% - 3.990%. If you fell in the middle of that range, that would be 3.3775%. This saves you approximately $302 per year. Take that across the span of a child’s 13 years in school and you have a savings of almost $4,000.
Our President and Chief Investment Officer, John-Mark Young did a very informational video explaining how to get a tax benefit (if your state offers it) for using the 529 to pay for private school tuition for grades K-12. You can watch that video HERE.
Types of 529 plans
Educational Savings Plans
This is an account where the account holder contributes money to a plan and the money is then invested in the stock or bond market. Then, when the child starts college or a trade school, they can use the funds from the 529 to pay for their education.
Prepaid Tuition Plans
This is where an account holder can lock in current tuition rates for their future student.
Advantages of a 529
High contribution limits
This is helpful since the average cost of tuition for a 4-year public university is over $25,000/year and over $100,000 for a 4-year bachelor’s degree.
Flexible Plan Location: you can choose to have either an educational savings plan that is invested or prepaid college.
Easy to open and maintain
Tax-deferred growth
No income tax on the growth as long as the money is used for qualified expenses
State Tax deductions
Can be passed from one child to another
Disadvantages of a 529
Limited investment options
Fees vary per state
Restrictions with changing plans
Must be used for education (you pay a 10% penalty and taxes if you use the money in a 529 for non-qualified expenses)
Qualified Expenses:
College, graduate, or vocational school tuition and fees
Elementary or secondary school (K-12) tuition and fees
Books and school supplies
Student loan payments (up to $10,000)
Off-campus housing
Campus food and meal plans
Computers, Internet, and software used for schoolwork (student attendance required)
Special needs and accessibility equipment for students
SAVING FOR COLLEGE USING A 529
November 4, 2022
Logan Doup
Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.
Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.
Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.
Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
