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Supercharge 529 College Savings with Child Tax Credit Cash

Sep 16, 2021

Parents, take advantage of this huge opportunity to increase college savings with free cash from Uncle Sam!

The government is now sending eligible parents cash each month. This free money can supercharge a child’s college savings nest egg and reduce future student loan debt. As MyCollegeCorner likes to say: “Saving a dollar today is better than borrowing one tomorrow®

This article will tell you why it makes sense for many people to invest this free Child Tax Credit money in a 529 college savings account.

The Child Tax Credit

In March 2021, the $1.9 trillion American Rescue Plan included a provision to provide eligible parents with up to $3,600 per child for children under six and $3,000 per child for ages 6 to 17.  Generally, single parents earning up to $75,000 and couples earning up to $150,000 per year are eligible for the full benefit. The first half of the credit is provided in cash with the first payments sent in July and the last installment scheduled for December 15th. The second half of the payment can be claimed when filing 2021 income tax returns.

This is a government program so you can expect lots of fine print. This IRS website nicely outlines the details and offers resources to better understand the program. And, of course, consult your tax professional for additional advice.

Join the crowd of college savers

In its 15th annual survey of parents released in September 2021, the College Savings Foundation found that:

  • 58% of eligible parents plan to use part of or all of the child tax credit to save for higher education, and
  • 72% of those will put the money in an existing 529 plan or will open one.

Why are college savers so excited about this?

Many families build their nest egg for college using a combination of:

  • nominal monthly contributions, often a slice of monthly income, that steadily increases savings, and
  • larger periodic lump sum contributions that often come from holiday and birthday gifts

The substantial cash from the Child Tax Credit can supercharge a college savings account, particularly for younger children. Here’s why:

Monthly vs. periodic lump-sum contributions

Disciplined monthly savings builds a wonderful foundation, the cake, if you will, with icing provided by the periodic lump-sum contributions.

  • Monthly savings: Saving $100 per month with a 4% rate of return compounded monthly over 18 years will provide $31,664 to pay for college.
  • Child Tax Credit lump sum deposit: Depositing $3,600 with a 4% rate of return compounded monthly over 18 years will provide $7,387 to pay for college.

Parents who invest the Child Tax Credit cash in a college savings account AND maintain a disciplined monthly savings program as outlined above may have approximately $39,051 for the child’s college education. What a gift!

Using the following free tools will help you estimate how much savings you will have based on the current ages of your children: the College Savings Estimator and the Cost of Delaying Savings Calculator

Why do so many families choose to save in a 529 college savings account?

According to ISS Market Intelligence, there are approximately 14.3 million 529 education savings accounts open with more than $437 billion invested as of June 30, 2021.

Why are 529 accounts so popular?

Tax-free growth:

529’s offer the tremendous benefit of tax-free growth and the ability to withdraw the savings without paying tax as long as they are used for Qualified Education Expenses (“QEE”). In addition to federal tax advantages, most states offer tax-free growth as well.  Some states offer other benefits, such as a 529 state tax deduction or credit as well. This free tool will help you identify state tax benefits offered by each state.

Use 529 savings for more than college.

In addition to using the savings for QEEs for higher education, savings may also be used to:

  • Pay down up to $10,000 of student loans,
  • Defray up to $10,000 per year of public, private, or religious elementary and secondary school tuition costs, and/or
  • Cover the cost of registered apprenticeship programs.

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.

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 or student 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 approximately $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 be as much as $2,000 of reduced financial aid. The 529 generally provides a superior vehicle for college savings given financial aid regulations for higher education.

No income limitations:

There are no income limitations associated with the 529 plan. Plans do have total aggregate caps on the amount that may be contributed. These limitations, often several hundred thousand dollars per account, are for contributions, not for the total account value. Contributions need to cease when the large aggregate caps are reached, but the savings can continue to grow.

Great for estate planning:

Money put into a 529 is removed from the account owner’s taxable estate. However, the account owner maintains control of the 529 account. For example, the account owner may change beneficiaries, move the account from one 529 plan to another or switch investment options within a plan.  Contributors may 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.

Be sure to read the 529 Plan’s Offering Document to get the details related to the plan you are considering. For help identifying a 529 plan, use this free 529 Search and Comparison tool offered by the College Savings Plan Network of the National Association of State Treasurers.

The last word

Cash from the Child Tax Credit can supercharge a child’s college savings account. If invested in a 529 college savings program, these monies will grow tax-free until they are needed for pre-college schooling, higher education, apprenticeship programs or to pay down student loans.  By taking advantage of this special opportunity to add the Child Tax Credit money to college savings accounts, parents can rest assured that they are helping their children achieve their dreams.