Have Time? 529!

Funding education for the next generation can be a powerful gift that many families and individuals strive to accomplish. Recently, my sister and brother-in-law took a look at astronomical projections of college tuition for their one-year-old, Elijah. After reviewing the projected cost, they shared a conversation and questions with me about savings and what would work best for their family. So, of course, we discussed the concept of time first.

Time plays an important role when deciding the strategy in which to fund the student’s schooling. If the child will be incurring expenses in the next few years, your options likely lay in a pool of scholarships, direct cash payments along the way, or student loans. Although these have their respective benefits, we typically suggest another savings vehicle if they have many years until college or attend a vocational school – the 529 College Savings Plan.

529’s, for short, are accounts provided at the state level that have an account holder and beneficiary. The primary account holder will always have complete control over the 529 with the beneficiary being the future student. Therefore, regardless of whether you’re a grandparent, parent, aunt, or uncle, everyone can contribute to the child’s account.

The predominant advantage to 529’s is the ability to invest after-tax dollars for growth until needed for qualified educational expenses. For example, my nephew has roughly 17 years until a college or trade school is within his line of sight. Therefore, we can take advantage of the long-term returns that markets have historically provided. In essence, Eli’s account has time to withstand the rollercoaster of events that will inevitably happen over the next two decades. When he becomes of age, they can either withdraw directly from the account or reimburse themselves after incurring costs while not paying any taxes. It’s important to note that if money is removed and not used for these qualified educational expenses, there will be ordinary income taxes due to the account’s earnings and a 10% penalty. 

As we all know, life can throw us curveballs, and schooling may not be a priority when the child grows older. However, if this hypothetical situation becomes a reality, this money is certainly not wasted and can continue to impact another family member’s life by simply changing beneficiary designations. Also, it is now allowed to use 529 funds for K-12 private tuition and other broad expenses.

It can be hard to grasp the reality that our young ones, who are playing with toys today, will eventually leave to pursue their own unique phase of life. Knowing that they have a strategic plan to help them can be a gratifying feeling. Feel free to contact an RK advisor for any questions that may have arisen while reading this article. We would be happy to assist you with the details of achieving your educational funding aspirations.

Daniel Maupin is an Associate Adviser with Rather & Kittrell.  Daniel is available at [email protected].