Recommendations for National 529 College Savings Plan Day
- May 23, 2019
With National 529 College Savings Plan Day just around the corner (May 29), a day intended to boost interest in 529 plans, I want to encourage parents to start saving for their children’s higher education. And a 529 plan is a great way to do this! Some of the benefits of these plans include tax-deferred investment growth and tax-free distributions for qualified higher education expenses. Plus, Virginia taxpayers may take a state tax deduction for contributions to their Virginia 529 accounts. Typically, this state deduction is available up to $4,000 per Virginia 529 account with unlimited carry forward.
As the parent of six children, I realize that saving for college can seem daunting. But, even small contributions can make a real difference. You can start saving into a Virginia 529 plan with as little as $25. 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, having just celebrated your first Mother’s Day or about to enjoy your first Father’s Day, 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!
There are two types of 529 plans: prepaid tuition plans and college savings plans. Prepaid plans allow you to lock in today’s college tuition costs. Over the years, these plans have been dwindling and are now only offered in certain states. Virginia’s Prepaid529 closed May 1, 2019. However, a new program, “aiming to make prepaying college expenses more affordable for more Virginia families,” is being developed and should be available in 2020. We look forward to seeing what the new plan has to offer. In the meantime, you can still put your money to work with the popular 529 college savings plan. It is important to remember that life changes, people move, and this type of plan can be used to cover qualified costs at most higher learning institutions. Also, if you are looking to pay for private K-12 education, some states, including Virginia, will allow you to use your 529 college savings plan.
529 college savings plans act as an investment account. Most investments are sensitive to the market and not guaranteed. Virginia’s Invest529 savings plan was rated Gold by Morningstar and ranked Top 10 by SavingForCollege.com. But, if picking investments is not your thing, I suggest choosing an age-based investment portfolio. With this option, your investment becomes more conservative as the portfolio date approaches. For example, Virginia’s Invest529 2036 Portfolio, which targets children up to 3 years old, is invested for long-term growth, with more than 75% invested in stocks. Whereas, the age-based portfolio for students approaching college (ages 16-18) is predominately comprised of more stable investments.
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 even offers a FDIC-insured savings option.
And finally, a word of caution. When saving for a grandchild, niece, nephew or close family friend, I generally recommend 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. If it is money you want to have control of, make sure the account is in your own name.
As National 529 College Savings Plan Day approaches, consider opening a 529 account as early as possible to take advantage of compound growth and tax savings. Of course, you can also contact a trusted financial advisor for help with education planning.
Jamie Malone, CFP, CPA, principal and financial strategist at Agili in Richmond and Bethlehem, Pa., manages the firm’s financial planning team while offering financial strategy and investment management to clients. He can be reached at JMalone@AgiliPersonalCFO.com.