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College Corner: The Best Way to Save For College

April 15, 2015

You're not alone if you feel that saving for college and selecting the correct savings vehicle can be a daunting task. A recent national Gallup survey revealed that saving for college is the top financial concern of parents with children under 18. A 2013 Sallie Mae survey found that 67% of families eliminated schools based on cost and the Wall Street Journal reported that 70% of undergraduates borrowed an average of $33,000 in 2014.

How do you increase college options and help reduce student loan debt for your family? If you haven’t starting saving yet, start now. When you save, you earn interest. When you borrow, you pay interest and incur long-term debt. There are many different investment vehicles you can use to save for college. Tax advantaged 529 Plans are widely considered to be the best way to save for college. To date, more than $355 billion have been saved in approximately 12.5 million accounts.

What is a 529 Plan? Congress established 529 Plans to enable states to offer tax-free incentives and special benefits to encourage students, parents and grandparents to save for college. Currently 49 states, including New York and New Jersey, offer over 92 savings plans.

Special 529 Plan Benefits and Tax Features
The unique benefits of 529s are not widely known:

> Tax Free Benefits. 
Savings grow federal and state income tax free. Withdrawals qualified higher education expenses are also exempt from federal and state income tax. In addition, some states offer a state tax deduction for contributions to their 529 plans.

> Ownership Control and Flexibility. 
The account owner retains complete control of the account and has the ability to:
     - change the beneficiary of the account at any time to an
       extended member of the family
     - change ownership of the account
     - control and direct all distributions
     - reclaim all funds in the account subject to a 10% penalty on the
       earnings portion only.

> Minimal Financial Aid Impact.
529 savings are treated as a parental asset when financial aid is calculated which means only 5.64% of the account’s value is used when determining your expected family contribution (EFC) each academic year. It is the same treatment as a bank savings, CD or investment account.

> No Income or Age Limit.
Anyone can open a 529 account, regardless of income level and age. There are no age restrictions on beneficiaries you can set up an account for a child, teenager, adult, and even yourself.

> Easy to Open and Low Cost.
Most plans have very low minimum monthly contributions (some as low as $15) limits making them attractive to families regardless of income level. Contributions can be made conveniently through payroll deduction or automatic transfers from a bank account.

> Used at Virtually Any College. 
Funds can be used at virtually any accredited college in the country including technical, career, two and four-year colleges and graduate schools. Funds can be used to pay for tuition, fees, room, board, books, supplies and required equipment and even off campus housing.

> Generous Estate Planning Benefits.
Special estate planning and gifting features enable you to reduce your personal taxable estate through accelerated gifting. You can make five years' worth of gifts (up to $70,000; $140,000 for married couples filing jointly) in one lump sum per beneficiary and avoid incurring a gift tax on this amount. Important to know that even though the account owner totally controls the funds in the 529 account, these moneys are not considered part of their estate for estate tax purposes. Maximum contribution limits up to $400,000 per beneficiary with no maximum account balance limit.

> Bankruptcy Protected. 
529 plan assets are protected from bankruptcy provided they have been in the account for longer than two years.

> Professional Investment Management with Diversified Investment Options.
A wide choice of investment options such as FDIC insured savings and stable value accounts, individual mutual funds, age based investment portfolios are available and managed by many of the nation’s leading financial service firms.

In summary, Section 529 is one of the most generous and flexible tax provisions ever passed by Congress for the benefit of American families. They provided extraordinary benefits to encourage families to save for college and avoid taken on long term student debt.

Are 529 Accounts Right for Your Family? The most important step is to develop a savings strategy that is right for your family to help provide your children options for college and avoid student loan debt. Save as early as possible and systematically and know that it is never too late to start.

To compare 529 plans and other tax advantaged college savings vehicles, go to Invite Education and contact your relationship manager at 844.274.2800.

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