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Is a 529 College Savings Plan Right for You?
A child’s college education can be one of the most important investments you will ever make. With education costs rising faster than inflation, the financial burden can be significant. There are many college savings options available such as 529 plans, education savings accounts, Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts, etc. We will help you choose the best option for meeting this goal. Our college planning platform enables us to project the cost of attending a particular school while factoring in the higher inflation rate for tuition, room, and board. With this information in hand, we can determine how much you should save every year.
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.
Accelerated Gifting to a 529 Plan
Utilizing the current $15,000 gift tax exclusion and five years of accelerated gifting, it is possible for an individual to contribute up to $75,000 in a single year. Both parents (via gift splitting) together can contribute $150,000. 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 allow you to build a portfolio from a wide selection of low-cost funds from Vanguard and Dimensional Fund Advisors 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.
Summary of Benefits of a 529 Savings Plan
- Distributions are federal and state income tax-free, as long as they are used to pay for qualified education expenses.
- There are no income limitations on who can contribute to a 529 Savings Plan
- Contribute up to the annual gift tax exclusion of $15,000 (2018) single or $30,000 (2018) per couple in one year, per beneficiary and not incur gift tax liability (use accelerated gifting to contribute up to $75,000/$150,000).