The financial services firm Edward Jones released findings from their annual 529 Plan Awareness Survey last week. Disappointingly, 529 Plan awareness has fallen nationally for the third year in a row. This is concerning because of the escalating costs of college.
Edward Jones’ study follows Sallie Mae’s “How America Saves for College 2014” study released last month. The findings from Sallie Mae’s study showed that only about half of American families are saving for college. 45 percent of families that are saving for college are doing so in a standard savings account. You know that account that earns you a fraction of a fraction of the return your bank earns by lending out your money to others.
To make matters worse, 18 percent of parents plan to raid their already low retirement accounts to help their children pay for college. Though we applaud this altruistic act, it foretells a chilling future for moms and dads.
The What of 529 Plans
A 529 Plan is a type of education savings account sponsored by states and education institutions. The most major benefit of this type of account is that earnings inside of it are not taxed a the federal-level, and often not taxed at the state-level, when used for qualified education expenses such as tuition, room and board, books and travel expenses.
Also Read: 5 Things I Learned After I Got Out of Debt
There are essentially four types of education savings accounts. While other types of education savings accounts offer similar benefits, the contribution limit for 529 Plans is what makes this account truly distinguishable from the others. At the federal-level there is no maximum contribution limit. Plan contribution limits may, however, vary at the state-level. Maximum annual gift contribution limits of $14,000, cash and other gifts combined per beneficiary, still apply.
The Who of 529 Plans
Anyone can open a 529 Plan for anyone who will go onto any post-secondary schooling. This includes vocational and technical schools, nursing programs, two and four-year programs, masters programs, etc. Anyone can make a contribution to a 529 Plan regardless of whether they opened the 529 Plan or not.
This is great for those who may be saying, “It’s all well and good that I can contribute an unlimited amount of money to this type of account for my child, Debt Free Guys, but I don’t have any money to contribute.” If this is you, our first piece of advice is to evaluate how you currently spend to see if you can find even $20 a month to contribute.
Regardless of how much you can contribute to this account on a regular basis, friends and family members can contribute. This leads us to our second piece of advice. The minute your child is assigned a Social Security Number, open a 529 Plan for them. Do this for each of your children. Set up automatic contributions to each account as feasible, then ask friends and family members to make contributions to these accounts for birthday, holiday and other gifts.
Each 529 Plan is opened by an individual who is called the custodian and each 529 Plan has one beneficiary, usually the current or future student. While each 529 Plan has one beneficiary, unused money in a 529 Plan may be transferred to the beneficiary’s other family members, including spouses, children, parents, siblings, etc, to be used for qualified (education) purposes. This is advantageous because unused amounts withdrawn for non-qualified purposes would otherwise be taxed and penalized.
The How of 529 Plans
Most 529 Plans allow for investments into mutual funds and annuities with more aggressive investment allocations for younger beneficiaries and more conservative investment allocations for older beneficiaries. Many plans allow the custodian to simply specify an investment allocation and the plan manager, an investment professional, will adjust the allocation mix based on this and the beneficiary’s age.
This is helpful because many custodians aren’t comfortable making investment decisions. 529 Plans allow a professional to handle investing the money within the plan and alleviate the custodian from having to do so.
The Types 529 Plans
There are two types of 529 Plans. There is the Pre-Paid Tuition 529 Plan and the College Savings 529 Plan. A Pre-Paid 529 Tuition Plan allows for the purchase of units or credits at participating colleges and universities for future tuition, room and board. This account typically requires state-residency. Essentially, the college saver can buy tuition, room and board credits for college in today’s dollars to attend school at some time in the future.
Over the last ten years, tuition has increased 8 percent annually. The average annual cost for in-state college tuition is currently $22,828. At this rate, one year of college 18 years into the future will cost $91,221. For illustrative purposes, $22,828 of credits purchased today will save a student $62,393 in 18 years. Most parents won’t buy that many credits the day their child is born, but the sooner they start to save and invest the better.
A College Savings 529 Plan is like a standard investment account that allows savers to contribute money into the account and then invest it in mutual funds or annuities to grow tax-free (as long as the withdrawals are for qualified purposes) over time. This plan does not require state-residency.
The Why of a 529 Plan
The reason to open and invest in a 529 Plan is to prepare your child for post-secondary education expenses. 529 Plans are not only for four-year colleges. With the exploding cost of a four-year education, some students may not see a worthwhile return on this investment. Regardless of where a child furthers their education after high school, money will be necessary. A 529 Plan, regardless of where the child goes to school, prepares them financially. 529 Plans generate a better return than a standard savings account and don’t put parents in precarious positions by requiring them to withdrawal funds from their retirement savings.
The When of 529 Plans
Now! The sooner parents, friends and family start to invest in a child’s 529 Plan the better. No variable of investing beats time spent in the market. The sooner an investment is made, the more time it has to grow and provide adequate money when it’s needed.
What You Can Do Today
Based on Edward Jones’ and Sallie Mae’s studies, the message about college savings and 529 Plans is not reaching families. The best thing you can do today is to share this information with as many people as possible and plant the seed of what must be done to combat the rising cost of post-secondary education.
As the title of this post alludes, this is one of the topics we will cover in our upcoming eBook #MoneyConscious Parent. #MoneyConscious Parent will supplement #MoneyConscious Student, which we published earlier this week to help high school and college-age students prepare financially for and manage post-secondary education. Buy a copy of #MoneyConscious Student for the student in your life today.