How Much Does College Cost?
It’s important to have an idea of what the expected costs of college are in order to help determine how much to save. Tuition, room and board in 2018 average $50,900 annually at private universities and $25,290 annually at public universities. The chart below summarizes the expected costs for the average public and private school costs for tuition, room and board.
|Public college tuition, room and board||10 Years Away
(child is currently 8 years old)
|18 Years Away (child is newborn)|
|Cost of public college today (national average)||$25,290||$25,290|
|Estimated future cost (5% inflation)||$177,555||$262,329|
|Lump sum today estimated to fund total cost (6% Return)||$97,103||$88,880|
|Cost of private college today (national average)||$50,900||$50,900|
|Estimated future cost (5% inflation)||$357,356||$527,977|
|Lump sum today estimated to fund total cost (6% Return)||$195,435||$178,885|
Why Should I Consider Saving in a 529 Plan?
Funding college for your student can be a daunting task, with expected average future college costs for newborn children ranging from $200,000 to $400,000. Luckily, there are strategies to help save for your child’s college expenses, with 529 plans being one of the most tax-efficient ways.
529 plans are tax-advantaged investment vehicles that enable and encourage families to save for future college costs. Investment earnings in a 529 plan grow tax-deferred and distributions that are utilized for qualified higher education expenses may be taken tax-free. In addition, sheltering investment tax on growth also allows for more money to stay invested, compounding growth faster. While contributions to a 529 plan are not federally tax deductible, certain states allow contributions by residents to be deductible at the state level.
What are the Types of 529 Plans Available?
There are two types of 529 plans: 529 prepaid tuition plans and 529 savings plans. 529 savings plans enable participants to establish an account into which funds can be contributed on behalf of a beneficiary and then allocated between various investment options offered by the plan. Investment options typically include bond mutual funds, stock mutual funds, money market funds, and age-based portfolios. The account value will increase or decrease depending on the performance of the investment options selected by the account owner and the investment return is not guaranteed. Withdrawals from these plans can be used at a wide variety of public and private colleges, graduate and professional schools, technical and trade schools around the country, and even at some universities internationally. Unlike prepaid tuition plans, withdrawals from savings plans will be considered qualified if used for tuition, room and board, textbooks, and certain technology and fees; and there is no state residency requirement.
The less popular type of 529 plan is the 529 prepaid tuition plan, which allows for the prepayment of future tuition (and in some plans, room and board) of in-state public universities at a set price today, effectively locking in the price. Some plans may be converted for use at out-of-state or private universities. When the beneficiary reaches
college age, the program then pays the future college tuition at any of the eligible universities in the state’s plan. Participants of the plan may purchase years or units of tuition with a one-time lump sum payment or through monthly installment payments. In many cases, these types of plans are state-sponsored and investments are guaranteed by state governments. In order to be eligible for a prepaid tuition plan, most state plans require that either the owner or the beneficiary of the plan must be a state resident.
Who Can Open a 529 Plan and Who Can be a Beneficiary?
Any adult can open a 529 plan. Accordingly, parents, grandparents, and even family friends are entitled to be account owners or contribute to an account that is already open. Some states even allow for trusts, corporations, or non-profit groups to open 529 plans. Anyone can be designated as a beneficiary, as long as they are a U.S. citizen or alien resident. As there is no age limit for beneficiaries, account owners can even establish themselves as the beneficiary in order to save for their own higher education costs.
How Much Should I Contribute?
In 2019, annual contributions of up to $15,000 per individual (or $30,000 if married and filing jointly) will qualify for the annual gift tax exclusion, meaning that these contributions can be made without triggering any gift tax consequences. Alternatively, contributors can elect to contribute up to five times the annual exclusion amount in one year– that’s $75,000 (or $150,000 if married and filing jointly) per child in one year, but a gift tax return will need to be filed and no additional gifts may be made to the recipient for 5 years thereafter.
What if my Loved One is Nearing or Already in College?
Saving into a 529 plan is an attractive option when your loved ones are young and funds in the 529 plan have time to grow and compound tax-free. Unfortunately, in cases where the student is nearing or already in college, the usefulness of contributing to a 529 decreases. Instead, consider helping your loved ones by paying for their tuition directly. Payments of college tuition that are made directly to the student’s qualified educational institution are not subject to gift taxes and do not count against the $15,000 annual exclusion gift you can make to benefit the same recipient. Be sure to make your check payable directly to the educational institution and not to the student or the parents in order to avoid gift tax consequences.
Saving into a 529 plan is an attractive option when your loved ones are young and funds in the 529 plan have time to grow and compound tax-free. Unfortunately, in cases where the student is nearing or already in college, the usefulness of contributing to a 529 decreases. Instead, consider helping your loved ones by paying for their tuition directly. Payments of college tuition that are made directly to the student’s qualified educational institution are not subject to gift taxes and do not count against the $15,000 annual exclusion gift you can make to benefit the same recipient. Be sure to make your check payable directly to the educational institution and not to the student or the parents in order to avoid gift tax consequences. A
What are Other Downsides to a 529?
The downside to utilizing 529 plans for college savings is that funds not used to pay for qualified higher education expenses are subject to ordinary income tax and an additional 10% penalty on the earnings portion of the withdrawal. However, in the event that the student does not need all the funds in the 529 plan, the funds can either be used for the student’s graduate or professional school expenses or alternatively, the beneficiary can be changed to a sibling or another family member.
Given the hefty amounts you could be putting away for college, we don’t normally recommend clients save the entire amount needed to provide for college into a 529 plan in the event your child decides not to attend college or receives grants or scholarships. Instead, we recommend utilizing a combination of college saving vehicles and a non-qualified brokerage account in order to help reduce the risk that your funds become subject to a penalty, as brokerage funds can be used for any purpose.
This material provides general information only. Beacon Pointe does not offer legal or tax advice. Private legal or tax counsel alone may be responsible and relied upon for these purposes. Only private legal or tax counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or material.