Last month, I wrote about how parents always want the best for their kids and will do anything to help them succeed. In that article, I discussed that some parents will even go into debt and take out a second mortgage to help pay for their kids college. Instead of doing this, I suggested saving for college when the children are young and allowing the money to grow. This will give the parents money for college and they won't have to take out any loans.
I have already written about two types of college saving plans and will continue with the third type of college saving plans in this article. The types of saving plans are: Prepaid College, ESA and 529 Plan, with a focus on the 529 Plan in this article.
The 529 Plan or Qualified Tuition Program is a plan that is operated by a state or university. These plans have tax advantages to make it easier to save for college. This plan allows the consumer to choose any 529 plan from any state. This allows states to compete for your business and some states will give a tax break on income taxes to keep your business.
The 529 Plan Basics:
- No Contribution Limit is designated by the IRS.
- According to the IRS: "Contributions to a QTP on behalf of any beneficiary can't be more than the amount necessary to provide for the qualified education expenses of the beneficiary."
- That basically means that there is no contribution limit, but most financial professionals point out the fact that contributions are included in the $14,000 gift tax exclusion. Therefore, most financial professionals suggest contributions of $14,000 per parent per year ($28,000 possible investment per year for a couple).
- There is a special provision with 529 plans that would allow parents to open an account with a superfund using up to 5 years of gift tax exclusion in one large lump sum investment of $70,000 per parent for up to an investment of $140,000.
- Contributions aren't tax deductible.
- No income limits on contributions.
- Anyone can set up a 529 plan for any beneficiary.
- Money grows tax free (tax-sheltered).
- Distributions are tax free for qualified education expenses.
- Distributions will be taxed, if used for anything other than an education.
- Contributions must be made in cash.
- A 529 may be rolled over to another account of a relative or the name of the beneficiary may be changed to a relative:
- Relatives of the beneficiary include:
- Siblings (including step-sisters and step-brothers)
- Parents (as long as the parent is under the age of 30)
- Brother or Sister of Parents
- First Cousins
- Son or Daughter of a Brother or Sister
- Son-in-law, Daughter-in-law, Father-in-law, Mother-in-law, sister-in-law and brother-in-law
- The spouse of any individual listed above.
- Relatives of the beneficiary include:
- No limits on the amount of rollovers per year.
As I mentioned in the article on the ESA, my wife and I plan to invest $4,000 in an ESA for our daughter prior to April 18th, 2017. This will jump start our daughter's college fund and help us as parents prepare for college. We have chosen the ESA at this time, because it gives you more freedom to choose any fund from the entire market.
After writing this article on the 529 Plan, I discovered that there is a big advantage with the 529 plan, because there is no contribution limit. If you have a lot of money to dump into a college fund, the 529 plan might be the better option, because you are putting a lot of money into the market for growth. We don't have a large lump sum of money to use for college funding and thus the ESA is the better option. Wealthfront wrote a great article about the benefits of super funding and I suggest reading this article if you are interested in investing more than $2,000 per year.
If you are interested in investing in a 529 plan, I found an article that lists all 529 plans for each state that is offered. The article can be found here.
No matter your choice of college investing, the most important thing is that you begin investing for your child's education at a young age. There is no better day than today to start preparing for your child's future.