College Planning: The Importance of 529 Plans
With tuition inflation running about double that of most other costs, parents (and perhaps grandparents) face a daunting task in saving for college expenses. College Savings Plans (or 529 Plans) are an invaluable tool that allow for a large amount of college saving on a tax-deferred basis. Distributions from a 529 account are federal and state income tax-free if they are used to pay for qualified education expenses such as tuition, books, supplies, and room and board. Contributions to a 529 are not tax-deductible for federal taxes, but some states will allow a deduction for those residents that contribute to the state’s College Savings Plan.
Utilizing the current $14,000 gift tax exclusion and five years of accelerated gifting, it is possible for an individual to contribute up to $70,000 in a single year. Both parents (via gift splitting) together can contribute $140,000. At Clarity, we consider 529 plans to be an invaluable tool in education planning, so we have spent some time reviewing different plans across the country. We currently endorse the Utah Education Savings Plan, which has earned Morningstar’s highest rating for the last 6 years and 11 of the last 13 years.
The Utah plan has no enrollment fee and no minimum contribution or required balance. The administrative fees are quite low. For example, the customized investment options (allowing you to build a portfolio from a wide selection of low-cost funds from Vanguard and Dimensional Fund Advisors (DFA)) are assessed an annual fee of 0.20%. Utah also allows a customized age-based set of 7 portfolios that automatically transition as the child ages.
One important feature of 529s is the ability to change the beneficiary. This can be especially helpful when there are more funds in the account than are needed for that student, a good problem to have.
If you would like to learn more about how a 529 plan can help meet your college savings needs, please contact us.