Don’t miss out on a 529 College Savings Plan

With Fall college tuition bills due right about now, it is difficult to ignore just how expensive a college education is. During the 2014-2015 academic year, the average cost of tuition, room and board at a public four year college increased about 3% to $18,943, and about 3.6% to $42,419 for a four year private college. As tuition costs continue to climb, saving for a college education is one of the most important decisions parents can make. So I was surprised to learn that in a recent study, two thirds of Americans are not familiar with 529 college savings plans.

Named for Section 529 of the federal tax code, a 529 college savings plan is a state sponsored program with tax benefits that allows families to invest for a child’s college education. Earnings grow federally tax deferred which means that money can compound faster because you do not have to pay taxes on current investment income or capital gains. Withdrawals from a 529 plan are also tax-free as long as they are used to pay for “qualified education expenses” which typically include tuition, room and board, books and school supplies, at virtually any accredited college or university in the United States.

Each state sponsors some type of 529 savings plan, managed by a fund manager chosen by the state, but you do not have to live in a state to participate in its plan. In Massachusetts, Fidelity manages the 529 plan. Typically, the fund manager adjusts the asset allocation from aggressive to conservative as your child approaches college age. The 529 account belongs to the parent (or grandparent) and the child is the beneficiary, so if your child decides not to attend college or does not use all of the funds in the account, all you need to do is change the beneficiary on the account to another qualified family member. There is no limit on annual contributions, only a lifetime maximum which varies by state and ranges from $200,000 to $400,000.

If you are wondering about the impact of a 529 plan on your child qualifying for financial aid, do not worry. Financial aid formulas consider 20% of the assets held in a child’s name available for college expenses but since the 529 is considered a parent’s asset, not the child’s, only 5.6% of the funds are counted. It is never too early to start saving for college, and a 529 plan just happens to be one of the best tools available to help you save for your child’s college education, and save a lot of money in taxes too. So spread the word!!

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