Written by: Jamie Malone, CPA, CFP®
Since National 529 Day, a day intended to boost interest in 529 college savings plans, is tomorrow, Saturday, May 29th, we thought now would be the perfect time to talk about how you can set yourself and your kids up for college success by funding a 529 account. A 529 plan is an easy and effective way for parents (and grandparents) to start saving for their children’s (and grandchildren’s) higher education. Some of the benefits of these plans include tax-deferred investment growth and tax-free distributions for qualified higher education expenses.
State Income Tax Benefits of a 529 Account
In addition to the federal tax benefits noted above, many states offer a tax benefit for making 529 contributions. For our clients in Virginia, you may be able to deduct (on your Virginia tax return) contributions of up to $4,000 per account to your Virginia-sponsored 529 plan each year with unlimited carry forward. For clients in Pennsylvania, it works a bit differently. You can contribute to any 529 plan you wish and receive a deduction for contributions of up to $15,000 per beneficiary for single filers and up to $30,000 for joint filers. Other states may offer income tax benefits as well (learn more at this Saving For College article).
College Savings Helped by Compound Interest
At Agili, we understand that saving for college can seem daunting. But even small contributions help. You can start saving into 529 plans with as little as $10. By starting to save as early as possible for a child’s higher education expenses, 529 account owners can take advantage not only of tax savings but also benefit from the power of time and compound interest.
Let’s say you’re a new parent and you choose to save $100 per month for 18 years into a 529 account. After high school, your child’s college nest egg could be nearly $40,000 (and all tax-free if used for qualified expenses). But, according to Virginia529.com, if you put off saving for even five years, your child’s college fund could be $16,000 less!
College savings plans act as an investment account. Most investments are sensitive to the market and not guaranteed. If picking investments is not your thing, we suggest choosing an age-based investment portfolio. With this option, your investment becomes more conservative as the child nears college age.
Parents Starting Late with College Savings Still Benefit from Opening a 529 Account
For parents who haven’t been able to save for college until a child is in high school, it may still be advisable to save into a 529. But choosing a more conservative 529 plan investment is likely prudent because of the shorter investment time horizon. This move enables parents to take advantage of any available tax benefits without taking on too much investment risk. For those wanting to avoid market fluctuations, the Virginia Invest529 plan, for example, offers Principal Protected Portfolios.
Not the Parent? Open a 529 Account in Your Own Name
And finally, a word of caution. When saving for a grandchild, niece, nephew, or close family friend, consider establishing the 529 plan account in your own name. If, for example, a grandparent makes contributions to a parent-owned 529 plan, the parent could potentially withdraw funds for a purpose other than a child’s college fund. To avoid this, be sure the account is in your own name.
Now is a great time to consider opening a 529 account as early as possible to take advantage of compound growth and tax savings. Of course, you can also contact your trusted financial advisor at Agili for help with education planning.