As the costs associated with higher education continue to increase, saving for college continues to become an increasingly daunting task. With college education expenses increasing at a rate close to 6% annually, it is important to start saving as early as possible. When determining where to begin your savings, we typically recommend using a Qualified Tuition Plan, also referred to as a 529 plan.
We recommend 529 plans because the plans are tax-advantaged investment vehicles specifically designed for expenses associated with higher education. The main benefits are that the investment returns are tax-deferred, and withdrawals are generally not subject to federal or state income tax when used for qualified education expenses. Qualified education expenses include items such as: tuition, room & board, books, and computer equipment. Many states also offer income tax deductions or credits to residents who contribute to in-state 529 plans.
529 plans are also and effective estate planning vehicle. An individual can gift assets to relatives or close family friends, and remove the assets from their estate. In addition, there is a provision in the law which allows contributors to front-load five years’ worth of gifts, effectively providing a way for married couples to shift $140,000 of assets out of their estate (provided there are no additional gifts to the beneficiary within that five year period).
One of the limitations to the 529 plan structure was the limited ability to change investment allocations throughout the year. The old rules allowed for one change to the asset allocation annually. However, a recent change in the law allows for two changes to the underlying allocations annually. This provides for the ability to take advantage of market swings and rebalance the accounts.
If you or anyone you know is thinking about starting a college savings account, please contact Heller Wealth Advisors to discuss the details with one of our financial professionals.