Most parents know they need to plan ahead for their child’s future college education, but few have a financial plan in place. The cost of four years at an in-state public university averages $35,000-$40,000 (not including books and living expenses). Private universities average more than twice that sum, while out-of-state schools can run even higher.
For parents who enroll their children in a 529 plan, the savings have several advantages. First, you control the investment and can choose investments that are liquid and easily converted to cash if needed. Second, earnings on contributions grow tax-deferred –- no income tax on gains while they remain in the account. Third, withdrawals from a 529 account to pay for qualified college expenses are not taxed and are eligible for an income tax deduction.
Moreover, the cost of a college education has been growing faster than inflation for decades. While there is no guarantee that future rates will continue at this pace, an investment in a 529 plan could allow you to pay less to educate your child than if you financed the degree with a conventional loan.
According to Savingforcollege.com, 529 plan assets averaged about $15 billion at year-end 2006 and were projected to reach $30 billion by 2008 – a stated 18-fold increase in four years. Clearly, 529 plans are a hot commodity, and many parents have caught on to their advantages.
Tips for Investing in a 529 Plan
When you start saving for college, planning ahead is the key. If you aren’t yet able to save $1,000 or more per month, it’s better to start small and commit yourself to increase your contributions when you can.
If your state offers a tax deduction for contributions to its 529 plan, you’ll want to take advantage of this benefit as long as it lasts. When selecting your investments, try to find choices that will still fit your portfolio’s overall risk profile after the deduction is applied. If no tax deduction is offered in your state, choose investments that are expected to generate the highest returns with the lowest volatility.
Uncle Sam Can Help Pay for Grades
The IRS allows you to use your annual 529 contributions as a tax deduction if they’re used for tuition, fees, and books at an accredited college or university. But this isn’t always the case, so it’s essential to check with the financial aid office at your child’s school before you contribute.
The American Opportunity Tax Credit is another valuable tax break for college savers. The maximum credit is $2,500 per eligible student and has been available since 2009 to help offset costs of up to $10,000 per year in tuition and other education-related expenses. In addition, by contributing to a 529 plan, you’re locking in your child’s current tax rates and protecting yourself from future changes in financial aid policy.
Ken Julian is the EVP of Client Portfolios with Halsey Advisors in Providence, RI. Since 1997, he has helped clients build investment strategies, selecting the right mix of assets, and managing portfolios.