College is an investment with a large upfront cost and an unknown future payoff in enhanced earning power, an inherently risky proposition. Further, student debt is a $1.5 trillion crisis, with recent graduates owing a soul-crushing average of just under $40,000. With college costs escalating rapidly, reducing future debt by starting to save as much and as soon as you can for a child’s college education is vitally important.
Enter the 529 College Savings Plan, a tax-advantaged vehicle authorized by Section 529 of the Internal Revenue Code and offered and operated by states to encourage parents and loved ones to save for a child’s education. Contributions to 529 plans are not deductible on your federal tax return, but your investment grows on a tax-free basis. Distributions are also tax-free, as long as they pay for qualified higher education expenses of the beneficiary, regardless of whether the college is public or private or where it is located.
Both www.savingforcollege.com and College Savings Plan Network (www.collegesavings.org) offer a wealth of free, comprehensive information on 529 plans. You should also consult your tax adviser.
The account owner names a beneficiary (the future college student). Funds in the account are used to pay qualified expenses of the beneficiary, but the owner controls when withdrawals are taken and for what purpose. The owner can even reclaim the funds (with tax and penalty) or change the beneficiary.
The Tax Cuts and Jobs Act of 2018 expanded the definition of qualified expenses to include up to $10,000 per year in K-12 tuition expenses at private schools. Not all states have conformed to the new federal definition.
Every state (except Wyoming) offers a 529 plan, open to residents of any state. While 529 plans share many characteristics, they differ as to the investment choices offered, fees, performance and state tax benefits. Information on Indiana’s CollegeChoice 529 Direct Plan (for do-it-yourselfers) is at collegechoicedirect.com/home.html, and the Advisor Plan at collegechoiceadvisor529.com/. In 2018, Morningstar awarded both Indiana plans its “Bronze” rating.
Ugift (collegechoicedirect.com/home/features-benefits/ugift.html) is a free-to-use (to both gift giver and recipient) service that lets account owners suggest family and friends celebrate children’s milestones with the gift of college savings in lieu of traditional gifts. The account owner gets a Ugift code that can be entered by family and friends to contribute online at any time.
Indiana’s tax benefit is extraordinarily generous. Hoosiers can claim a 20 percent income tax credit—up to a maximum of $1,000 per return each year—for contributions made directly to a CollegeChoice account, whether the contributor is account owner or not. Make a $5,000 contribution postmarked or electronically initiated by Dec. 31 and you can take a $1,000 credit on your 2018 Indiana income tax bill. On a net basis, each dollar contributed costs you only 80 cents, representing a risk-free 25 percent return on your investment.
“Pete the Planner” Dunn is an award-winning columnist with an uncanny knack for explaining personal finance concepts. According to Pete, “the easiest way to fund college is to fund this goal over time. If you start saving right away, then time becomes your friend. If you wait until your kid is old enough to spell ‘college,’ then time is your enemy. Here’s what I mean:
◗ $200 saved per month for 18 years (started the month your child is born) at a hypothetical 8 percent rate of return will give you $97,071 by the time college rolls around.
◗ $200 saved per month for 12 years (started on your child’s sixth birthday) at a hypothetical 8 percent rate of return will give you $49,188 by the time college rolls around.
“Waiting just six years cuts your college savings IN HALF!!!” Pete writes. “That’s not good, but it’s math. So don’t fight math. Use math.”•
Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC. He can be reached at 812-376-9444 or [email protected]