529 Day: CV-19 has Not Changed the Importance of Saving for College
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529 Day: CV-19 has Not Changed the Importance of Saving for College

May 27, 2020

The global CV-19 pandemic has reshaped our lives and thrown chaos into every element of the college process. But has it changed the way we should think about saving and paying for college?  Is this 529 Day – May 29, 2020, the year of CV-19, truly different from years past?  Not when we consider the big picture.

One important element of saving for college is the concept of time horizon.  How long is it until money is needed to pay the college bill?  Given the long-time horizon most college savers have until their children reach college age, this 529 Day is like others and how we think about saving for college should not be altered.  For those with children very near college, the best advice is to ensure that your current nest egg is protected.

In the near term, some families may not be able to contribute as much now as they have in the past or would like to in the future.  That’s ok.  On this 529 Day, like others in the past, knowing the options to save for college, making a plan, or reviewing your current one still makes sense.

Options to save

529 Savings Programs and Coverdell Education Savings Accounts have become very popular because each offers tax-advantaged opportunities to save for education. Earnings accumulate tax-free, and withdrawals for education-related expenses are also tax-free. Both permit withdrawals, with some limitations, for K-12 schooling as well as college.

The primary differences between 529 Accounts and Coverdell ESAs:

  • Coverdell has income restrictions (Adjusted Gross Income below $110,000 for single filers, $220,000 for joint filers).
  • The maximum annual contribution is $2,000 per beneficiary.
  • Savings must be used before the beneficiary reaches age 30.

Although any savings account is helpful, these accounts offer special tax advantages that savings in most banks and other taxable accounts do not enjoy.  529 accounts have become particularly popular because of a number of other features that provide great flexibility for account owners.

Benefits of 529 College Savings Account

1. No income limitations & generous contribution caps:

There are no income limitations associated with 529 plans. Plans do have total aggregate caps on the amount that may be contributed to the account, but these limitations are only for contributions, not for the total account value. 

2. Tax-free growth and distributions:

529s offer the tremendous benefit of tax-free growth from the time the money is contributed to the time it is withdrawn.  The tax-free distribution is permitted as long as the money is used for Qualified Education Expenses. Qualified Education Expenses include tuition, fees, room and board, computers, and other equipment.  Transportation expenses and dues paid to sororities and fraternities are not qualified.  In addition to federal tax advantages, many states offer state tax benefits as well.

3. It’s easy to switch beneficiaries. 

Some parents are concerned that their child may not attend college or there may be money left over.  If that’s the case, the account owner may redesignate a beneficiary, including naming themselves. In the worst case, withdrawals for non-qualified expenses incur a 10% penalty and require taxes to be paid on the earnings.

4. Among the best savings options when considering financial aid:

Families concerned that their savings may affect their eligibility for need-based financial aid should consider 529s. Ultimately, the way cash is saved is what’s most important. On the FAFSA (Free Application for Federal Student Aid), money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at a maximum of 5.64%. For example, $10,000 saved in a 529 could end up reducing financial aid eligibility by $564. This is much better than having money in a standard savings account in the student’s name, where it can be weighed against financial aid eligibility up to 20%, which could reduce financial aid by $2,000. 529s provides a superior vehicle for college savings given financial aid regulations for higher education.

5. Great for estate planning:

Grandparents find 529 to be a viable means of helping fund college for their grandkids while retaining control of their assets as part of their estate.  Money put into a 529 is removed from the taxable estate, but grandparents are able to retain rights of control over the 529 account even when funding is typically used to cover future college expenses for their grandchildren. With a 529 Plan, you are able to make a lump-sum contribution equal to five years of the annual $15,000 gift tax exclusion to a beneficiary in a single year. This means that you can give up to $75,000 (if you are single) or $150,000 (as a married couple) at once, per beneficiary, without having to pay gift or estate taxes. And, if the 529 funds are used by the grandchild in the last two years of college, the funds don’t need to be reported on the FAFSA form.

Saving for college remains important

CV-19 has not changed the fact that saving for college is an important way to minimize future college debt.  Saving a dollar today is better than borrowing one tomorrow®.

® – Registered Trademark of Invite Education, LLC