Episode 078

How to Gift Your Kids a Student Loan Free Education

It’s no secret the cost of higher education is increasing at a fast rate. And now, students are entering college with serious “sticker shock” only to graduate with immense student loan debt. But imagine giving your child the gift of graduating debt free. Well, a good financial planner is no stranger to solutions that’ll make this possible for you. Whether you think you’ve got enough time to plan for college or not, saving money now may be a lot easier than you think.

The IRS’s Secret Weapon for Savings
The 529 Plan, otherwise known as the College Savings Plan, is an investment vehicle designed to encourage saving for future higher education expenses. Unlike the name suggests, this account can be used to pay for education expenses from K through 12, not just college. This includes any public, private, and religious institution. A 529 Plan has a single owner, usually a parent, who invests in the account for a single beneficiary, like your child, allowing them to receive funds covering the cost of tuition, computers, books, etc. However, the owner of the account doesn’t need to be a parent. In fact, anyone can start a 529 Plan for whoever they wish. Even for themselves! Most plans have what’s called an age-based portfolio. This type of portfolio works in a way so that investments become more conservative as the beneficiary gets closer to college age. This means a younger beneficiary’s portfolio is mostly made up of stocks while an older beneficiary’s portfolio is mostly bonds. If you’re familiar with target date funds, like in a 401k, the concept is basically the same.

How the 529 Plan Benefits You
There are 2 different tax benefits that come along with the 529. One of them is a federal tax deferral. When investing in a brokerage account, and after deciding to withdraw funds from an account, you end up paying taxes on any amount of money that has been gained. Otherwise known as a capital gains tax. But with a 529, your investment could grow to a large amount, and once taken out for qualified expenses, you are not taxed a single cent. The growth is tax deferred. Most states also give their own tax benefits. For example, in New York, married couples can deduct their contributions, up to $10,000 per year, off their New York state income tax return. Another great thing about the 529 is most of them don’t require an initial investment. If they do, it’ll likely be a small amount. Since most plans are offer age-based portfolios there’s no need to be knowledgeable about investing. The management of funds is completely handled for you. Of course, a financial planner can help guide you towards the best plan for you to take advantage of the tax benefits while helping you figure out the perfect size of investments necessary to make college as affordable as possible.

Things to Consider
It’s possible the beneficiary may receive enough scholarships to cover the cost of college. Or perhaps they decide to not go to college at all. What happens to the investment? With a 529, it is easy to switch beneficiaries. So, if you have more than one child to worry about when it comes to paying for college, you’ll be able to sign him or her as the new beneficiary with no cost to you. Worst case scenario, if you end up not using the funds for education expenses, you pay a 10% penalty plus taxes on the earnings. Regardless of that, the 529 is a great tool. Financial planners encourage 529 plans and can help you do projections based on future costs for colleges or private schools. Remember, if you’re serious about having the money necessary for the rising cost of education, the sooner you’re able to invest the better it’ll be.  As always, be sure to consult with your tax advisor and/or financial planner to develop a plan that is best for your individual circumstances.