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Investing for education expenses

Section 529 savings plan

The cost of a college education continues to rise

Over the past decade, published in-state tuition and fees at public four-year institutions increased by 16% in inflation- adjusted dollars. The current average total cost of one year at a public four-year institution (in-state) is $38,330, and $50,770 for a private four-year institution. How much could a college degree cost in five or 10 years?

Source: College Board, Trends in College Pricing 2020.

College savings plan

A 529 plan is a flexible savings plan designed for future higher education costs. Many states sponsor these tax- advantaged college savings plans which offer key incentives, including federal (and possible state) tax-free distributions when used for qualifying education expenses. Nonqualified withdrawals of earnings are taxed as ordinary income and may be subject to an additional 10% federal early withdrawal tax penalty. Your financial professional can perform a college cost calculation and help you develop a savings plan.

With most 529 plans, you can:

Use the money at any eligible school in any state (rules may vary by state; consult your financial professional). Money accumulated in most plans can be used for room, board, books and supplies at any eligible accredited two-year or four-year college or university, or post-secondary vocational training program in the United States. After 2017, distributions from a 529 plan of up to $10,000 to pay tuition expenses for enrollment at a public, private or religious elementary or secondary school are treated as qualified expenses. Please note that some states offer favorable tax treatment to residents only if they invest in their state’s own Section 529 plan.

Invest without income restrictions. Anyone (parent, grandparent or others) can establish a Section 529 account, regardless of income level or beneficiary’s age. This might be ideal for high-net-worth investors to help reduce estate taxes while contributing to a child’s education.

Withdraw earnings tax-free. Investment earnings, when withdrawn for qualifying education expenses, are tax-free. Any earnings proceeds not used for qualifying education expenses will be subject to federal income taxes and a 10% federal early withdrawal tax penalty.

Change beneficiary designation. You can change the beneficiary at will to certain other family members of the original beneficiary. This means if one child does not use all the money for education, you can designate the funds to another beneficiary.

Realize enhanced gift tax benefits. You can contribute up to $15,000 to a Section 529 plan in a year without gift tax consequences. You may contribute up to $75,000, provided you elect to spread the gift evenly over five years. No other gifts are allowed to that child for a five-year period without gift tax consequences.

Additional education options:

Coverdell Education Savings Account

Coverdell Education Savings Accounts (ESAs) can enable you or other family members to set aside up to $2,000 annually for each child to help pay higher education and primary and secondary education expenses. Earnings accumulate on a tax-deferred basis and withdrawals are tax- and penalty-free when used for qualifying education expenses.

Contribution amounts may be limited, depending on the adjusted gross income of the person or persons making the contributions and they can be made until the beneficiary reaches age 18. Your financial professional can provide more information about ESA contribution limits.

Custodial accounts

Custodial accounts are for a beneficiary under the age of 18 to 21 (depending on the state of residence) and can be used for any purpose as allowed by state law. Once a beneficiary has been selected, it cannot be changed. These financial accounts can be set up through a bank, a trust fund or a brokerage account, and have no maximum contribution, income or penalty for nonqualified withdrawals. Contributions and earnings cannot be reversed which irrevocably pass to the beneficiary upon age of majority.

Want more?

Contact your financial professional for more information about a Section 529 plan and other savings plans. You can also check out the Education Center for useful information and tips to help you plan and achieve the future you want. 

Section 529 plans can lose value and are not government or FDIC insured. The value of an investment in a Section 529 plan will fluctuate and, when withdrawn, can be worth more or less than its original cost. There is no guarantee that the plan will grow to cover college expenses.
Some states offer favorable tax treatment to residents only if they invest in their state’s own Section 529 plan. You should consult with a tax advisor regarding the state tax consequences of any investment in a Section 529 plan.

With access to a broad range of investments from nationally recognized investment managers, your financial professional has the flexibility to help you design a unique funding program to suit your particular needs. Though your child’s or grandchild’s college years might still be in the future, now may be the time to begin the planning and investing.

To obtain a 529 plan offering statement, contact your financial professional. You should compare any 529 plan you are considering with any 529 college savings plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other benefits that are only available for investments in the home state’s plan. Please read the plan’s offering statement which includes investment objectives, risks, fees, charges, expenses, and other information. You should read it carefully before investing.