It’s 5-29 Day! Time to Start or Re-think Your 529 College Savings Plan?Submitted by Washington Wealth Advisors | Falls Church and Ashburn, VA on May 23rd, 2018
By Ann Blakey, MBA, RP®
May 29th is National 529 College Savings Plan Day – and while we aren’t sending each other Hallmark cards for this holiday (yet!), it is a good reminder to stop and think about your family’s education savings strategy.
According to a recent Fannie Mae study, only about 50% of all families with children under 18 are saving for their kids’ education. If you have young children around the house, the idea of them leaving for college probably seems ages away. But the college process has become more complicated and expensive. Therefore, you need to start saving for college while your children are young. And, if you have been diligently saving, dropping them off at their college dormitory will at least be without financial worries!
Despite the many advantages of 529 plans, using your child’s 529 fund to pay for education isn’t without its complications. As we celebrate National 529 College Savings Plan Awareness Day, let’s look at ways to save as well as how to avoid some common withdrawal blunders.
- 529s are not just for college anymore! The new federal tax legislation passed in 2017 made a significant change to how 529 plan funds can be used – up to $10,000/year can now be withdrawn for private K-12 school tuition. Consider opening a separate 529 account for K-12 tuition, so that your college saving strategy does not get de-railed.
- Tax free withdrawals and state tax deductions! You probably already know that your 529 plan savings grow tax-free. In addition, many states offer significant state tax deductions for contributions to 529 plans. In some states, these deductions are per account, so it may make sense for you to open multiple accounts per child so that you can use multiple state tax deductions. Consider suggesting a 529 plan as a lasting gift from the grandparents!
- Starting small beats not starting at all: Most plans will allow you to open an account for a small minimum investment and have automatic savings plans to make it easy for you to save systematically. Consider suggesting a 529 plan as a lasting gift from the grandparents that they can add to at every birthday.
- Financial aid friendly: 529 assets are owned by the account holder (parent or grandparent), not the student. That means the 529 assets will not affect financial aid calculations as much as if the child has their own savings or custodial account. Plus, you can re-assign the funds to another family member if necessary.
- Deciding on an investment strategy: Most 529 plans offer ‘Age-Based portfolios’, which adjust the mix of investments over time as your child ages. Choosing such a portfolio makes it easy to stay properly balanced. If you are planning to use 529 funds for K-12 tuition, be sure to consider the shorter time-frame when choosing a portfolio.
- Withdrawing too much or too little: You can use your 529 funds tax and penalty-free to cover any qualified higher education expense (QHEE) such as tuition, books, supplies, and some fees. It’s critical to calculate and track these expenses so you know how much to withdraw from your 529 account. If you withdraw more than you spend in one calendar year, you or your beneficiary will have to report the excess as taxable income and pay the 10% penalty.
On the other hand, if you take too little and are left with a balance in the account after your child graduates, you will incur the tax and penalty to withdraw it unless you have another child you can transfer it to.
- Not accounting for tax credits: This is where things can get dicey. In the previous point, we talked about not withdrawing too much. But even if you estimate the costs correctly, you could still end up with an excess due to the claiming of educational tax credits. The IRS doesn’t let you double dip and benefit from both the tax credit and the tax-free withdrawal on the same portion of money.
For example, if you claim the $2,500 American Opportunity Credit, you must deduct from the QHEE $4,000 that was used to receive the credit. For the Lifetime Learning Credit, you may need to adjust the QHEE for as much as $10,000.
- You don’t use your withdrawal in the same year you received It: When you withdraw funds to cover expenses, you need to use them up in the same tax year you received them, or risk penalty. Many people mistakenly believe they have to wait until tuition is due to request money from their 529, but a distribution can be taken at any time during the year and used any time that year for qualifying expenses.
One factor that often trips people up is second semester tuition. Many colleges send out bills in December that are due in January. You may run into trouble if you withdraw funds in December, but don’t use the 529 money until the next calendar year. This is why it is important to take the time to calculate expenses and estimate what you will need to pay for the year.
- You send the withdrawal directly to the school: It may seem simpler to cut out the middleman (yourself, in this case) and have the withdrawn funds sent directly to the college’s bursar. But this could backfire if your child is using financial aid. Every school treats 529 money differently, with some viewing it as a scholarship, thus reducing the amount of financial aid your child will qualify for. You can always contact the school and verify how they treat the funds, or you can request a check be cut to you or your child and take care of the school payment yourself.
At Washington Wealth Advisors, we want to help you make the most of your money. It’s wise to work with someone well versed in college savings plans who can walk you through the ins and outs of 529 withdrawals to avoid losing any of your money to taxes and penalties. If you want to discuss your unique situation, call our office at 703.584.2700 or email firstname.lastname@example.org.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Washington Wealth Advisors, LLC), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Washington Wealth Advisors, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Washington Wealth Advisors, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Washington Wealth Advisors, LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Washington Wealth Advisors, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Washington Wealth Advisors, LLC’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.