How to Save Money for College

Published on March 21, 2020

By Chris Nolt, Solid Rock Realty Advisors, LLC,

            There are many ways one can save money for their children or grandchildren’s college expense.  One of the best ways is with a 529 College Savings Plan.  

            There are two types of 529 plans – college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan and one can invest in any state’s plan. 

            529 plans offer benefits including federal income tax savings, state income tax savings, control, simplified tax reporting and investment options.

            Although contributions are not tax deductible at the federal level, earnings in a 529 plan grow federal tax-free and distributions for qualified expenses are tax-free. 

            As of Jan. 1, 2018, tax-free withdrawals may also include up to $10,000 in annual tuition expenses for private, public or religious elementary and secondary schools. 

            In addition to the federal tax savings, many states offer a full or partial deduction or credit for 529 plan contributions.  Also, we don’t necessarily have to contribute to our home state’s 529 plan to receive this tax deduction.

            Many people have used UGMA accounts to save for their child or grandchild’s education.  With a UGMA account, however, the individual is the custodian of the account and the child gains full control when they reach the age of majority, typically age 18 or 21.  

            With a 529 plan the donor, controls the account. A child or grandchild is the beneficiarys of your plan and with few exceptions, the named beneficiary has no legal rights to the funds in a 529 plan. 

            This way, donors can control the money, which may help to ensure that the money will be used for its intended purpose.

            Contributions to a 529 plan do not have to be reported on a federal tax return. Account holders won’t receive a Form 1099 to report taxable or nontaxable earnings until the year they make withdrawals. 

In 2019, deposits to a 529 plan up to $15,000 per individual per year, $30,000 for married couples filing jointly, will qualify for the annual gift tax exclusion.  

            Holders generally have access to multiple mutual fund companies within a 529 plan.  It is wise to compare the expense ratios mutual funds among different state plans. We can also roll over a 529 plan from one state’s to another state’s plan.  

            Everyone is eligible to take advantage of a 529 plan. Unlike a Roth IRA and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits. There are lifetime contribution limits which vary by plan. 

            Those looking to reduce estate taxes can elect to treat a 529 plan contribution of between $15,000 and $75,000 as if it were made over a five calendar-year period to qualify for the annual gift tax exclusion.

            A 529 account owner can withdraw funds at any time for any reason, but keep in mind the earnings portion of non-qualified withdrawals will incur income tax plus a 10 percent penalty tax

            Chris Nolt is an independent, fee-only registered investment advisor and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. 

             To order a copy of Chris’s new book, Financial Strategies for Selling a Farm or Ranch, visit Amazon.com or call Chris at 800-517-1031.