Numerous studies show that individuals earn income that is directly correlated to their level of education.\u00a0 The higher one\u2019s level of education, the greater one\u2019s lifetime earnings.\u00a0 Think of a labor in an onion field with a grade school education versus a software engineer with several decades of education. If you are considering how you will afford your child\u2019s college costs, you may be wondering if a 529 college savings plan is the right choice.<\/p>\n
We have seen through our experience with the novel coronavirus that education can be related to personal safety at the work place.\u00a0 Individuals with a high school education or less often work in jobs that require physical activity and many of these jobs have been on the front line in the pandemic.\u00a0 Think about that field worker living in cramped shared-housing.\u00a0 Highly educated individuals work with information and perform advanced skills and many of them have been able to practice physical distancing throughout the pandemic.\u00a0 That software engineer was allowed to work from home.<\/p>\n
Education provides a ticket to a better life.\u00a0 However, the cost of an education is often a major obstacle. \u00a0 Student debt has become great burden borne by many young adults after they graduate and enter the workforce.\u00a0 This debt can prevent young people from moving out on their own, getting married, and starting a family.<\/p>\n
The key to getting an education, other than studying hard, is to save for it.\u00a0 The best way to save is the 529 college savings plan.<\/p>\n
The 529 plan originates from a section of the Internal Revenue Code which was added in 1996.\u00a0 It authorized the use of these accounts to pay for qualified tuition without the payment of taxes on the gains inside these accounts.<\/p>\n
There are two basic versions of a 529 plan: a prepaid tuition plan and the college saving plan.\u00a0 We will devote our attention to the latter, as it is the far more common of the two.<\/p>\n
The major attraction of the 529 college savings plan is the tax benefit<\/a><\/span><\/strong>.\u00a0 The growth of these accounts is tax-free.\u00a0 Here\u2019s an example:<\/p>\n Assume you invest $5,000 a year over 20 years to educate a child.\u00a0 So, your total investment is $100,000.\u00a0 You would pay no tax on any of the income during this accumulation period.\u00a0 Now, let\u2019s assume that at the time you wish to begin taking money out of the account, it has a value of $150,000.\u00a0 So, the gain is $50,000.\u00a0 All of the distributions from the account are tax-free, as long as they are used to pay for \u201cqualified higher education expenses.\u201d<\/p>\n Many, but not all, states offer a tax benefit for state residents contributing to the state\u2019s 529 plan.\u00a0 In Oregon<\/a><\/span><\/strong>, residents may receive a state income tax credit up to $300 for joint filers up to $150 for single filers on contributions made to their Oregon Colleges Saving Plan account.<\/p>\n California and Washington State, unfortunately, do not offer a deduction for contributions to its (or any) 529 plan.<\/p>\n The definition of qualified higher education expenses has been expanded several times over the years to include expenses that range from laptop computers to K-12 tuition. \u00a0 The defines these expenses as \u201cQualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution.<\/p>\n <\/p>\n Contributions into a 529 account are treated as gifts for tax purposes.\u00a0 A person may gift up to $15,00 into a 529 account without tax consequence.\u00a0 It is possible to super charge a 529 account by bunching gifts into it.\u00a0 Specifically, you may put 5 years of gifts or $75,000 (5 X $15,000) into a 529 account in one year.\u00a0 However, it will not be possible to make tax free gifts in the subsequent four years.<\/p>\n 529 plans offer a variety of investment options.\u00a0 Age-based investment options are packaged portfolios that have risk characteristics that are directly related to the age of the student\/beneficiary. \u00a0 As the beneficiary gets older and closer to college, the portfolio will automatically rebalance into an ever-more conservative asset allocation.<\/p>\n A static investment option is characterized by an asset allocation that does not change over time.\u00a0 These options are offered based on the degree to which they are risky (i.e. conservative to aggressive), their exposure to markets (e.g. US stocks, international stocks, etc.) or based on some kind of environmental, social, or corporate governance screen.<\/p>\n Investors may also have access to a broad menu of funds similar to that found in a robust 401(k) or 403(b) retirement plan.\u00a0 The account owner can build a portfolio using these funds in an a la carte manner.<\/p>\n There are some reasons why you may not wish to use a 529 college savings plan.\u00a0 There are limits on how much you can invest in them.\u00a0 If you take out the money for expenses that do not qualify, you will pay taxes on the (earnings portion of the) distribution and a 10% penalty.\u00a0 Ownership by anyone other than the student or parent can make qualifying for financial aid problematic.\u00a0 Also, the expenses of a 529 college savings plan can be burdensome, particularly if it is an \u201cadvisor sold\u201d plan.<\/p>\n College is expensive.\u00a0 The University of Oregon costs approximately $30,000 for residents and $57,000 for nonresidents.\u00a0 UC Berkeley costs approximately $40,000 for residents and $70,000 for nonresidents.\u00a0 The University of Washington costs $30,000 for residents and $57,000 for nonresidents.\u00a0 Private colleges are generally higher.<\/p>\n So, four years of college can cost $120,000-$300,000.\u00a0 That\u2019s a lot of money.\u00a0 How do most people do it?\u00a0 They start saving early and they save systematically over many years.\u00a0 If you do that, you can get there.<\/p>\n Let\u2019s assume you want to have $150,000 saved for a child\u2019s college education.\u00a0 If we assume you save over 20 years and earn 5% (on average), you need to $3,850 per year.\u00a0 That\u2019s achievable for most middle-class Americans.<\/p>\nState Tax Benefits<\/b><\/h2>\n
Education Expenses<\/b><\/h2>\n
Want to learn more about financial planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.<\/span><\/a><\/strong><\/h2>\n
Gifting Opportunity<\/b><\/h2>\n
Investment Options<\/b><\/h2>\n
Disadvantages\u00a0<\/b><\/h2>\n
Start Early<\/b><\/h2>\n