Saving for College Doesn't Need to be Painful

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The average student graduating from college right now has more than $35,000 in student-loan debt, according to a May 8, 2015, Wall Street Journal article by Jeffrey Sparshott. No one wants to see their child encumbered by such a burden, yet many parents find it difficult to make space in their budget to finance a four-year (or longer) stint in college.

While there are several options for saving early, a popular one is the 529. According to Blueway Financial Partners of Raymond James & Associates, there are several important facts to know about the 529 plan:

  • 529s are tax-advantaged, diversified investments that have the potential to grow faster than traditional savings.
    • Over the last decade, college tuition increased by an average of 5% annually. That's substantially higher than the general inflation rate, the average increase in personal income, and the average interest on a traditional savings account.
  • Funds can cover tuition, books, room and board, and now computers.
    • Withdrawals are tax-free if used for qualified expenses at eligible schools.
  • They can be opened with as little as $25.
    • There are no income limits on establishing or contributing to a 529. Anyone can invest.
  • Your estate can benefit through a unique 529 plan gift provision.
    • With "accelerated gifting," you can contribute up to five years' worth of gifts ($140,000 for a married couple) at one time per child beneficiary and significantly lower your estate's tax liability.
  • Assets in a 529 remain in control of the person who owns the account, not the beneficiary.
    • You can change beneficiaries at any time, and all unused assets can be withdrawn, though earnings may be subject to taxes and a 10% penalty.
  • Owning a 529 may not limit financial aid opportunities as much as you think.
    • Since the assets belong to the account owner and not the beneficiary, they are assessed at a smaller rate when deter­mining aid.

There are also common misconceptions associated with the 529 plan:

Myth: Only parents can establish a 529 account for a child.
Reality: Anyone can open and contribute to an account for any beneficiary—no age limits or family connections necessary. Often, grandparents open 529 accounts to help fund college for grandchildren (with the added bonus that their assets won't be factored into financial aid calculations and they may even benefit from reduced taxes on their estate).

Myth: Once the child is in college, he or she has control of the 529 account.
Reality: The account owner has—and maintains—control of the assets as long as the account exists.

Myth: Contributions to a 529 plan will limit financial aid opportunities.
Reality: While 529 assets can have an effect, it isn't as significant as the impact of some other educational savings tools. Since 529 assets are under control of the account owner (not the beneficiary), they're assessed at a maximum rate of 5.64% when determining expected family contribution (part of the financial aid formula). In comparison, investment assets in the student's name, such as UTMA/UGMA accounts, are assessed at 20%.

Myth: I have to invest in the plan sponsored by the state where I live.
Reality: You can invest in any state's 529 plan, but look at what your state's plan offers first since some provide state tax breaks and other benefits to residents. Plans offered by other states may not provide these same benefits.

Myth: If I invest in a 529 plan, the beneficiary is limited to attending a public, four-year university.
Reality: Funds can be used for qualified expenses at eligible educational institutions in the U.S. and even some abroad, including private or public colleges, universities, and technical or vocational schools that qualify for federal financial aid. Check the Department of Education's website (fafsa.ed.gov) and click School Code Search to find qualifying institutions.

Myth: If it turns out the beneficiary doesn't go to college or receives a scholarship, all the money I've invested is lost.
Reality: Since the owner—not the beneficiary—controls the account, you can change who receives the funds to any eligible family member. Another, although less attractive, option is to take a nonqualified withdrawal. Earnings are then subject to the usual taxes and a 10% penalty (penalty waived in the instance of a scholarship).

Myth: I can't participate in a 529 plan because my income is too high.
Reality: Anyone can invest. There is actually no income limit to establish or contribute to a 529 plan.

Source: Blueway Financial Partners of Raymond James & Associates

You can learn more about Michigan's 529 plan by visiting www.misaves.com, and by contacting your financial advisor.


The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with any other entity listed herein. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Asset allocation does not guarantee a profit nor protect against loss.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. You should consult a tax advisor regarding any state tax consequences before investing in a 529 plan. Diversification does not guarantee a profit nor protect against loss: Investments are subject to risk including the possible loss of capital. Certain conditions may apply.

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