Contributing to a 529 College Savings Plan is a smart way to save for college and contributions are a great gift idea for friends and family members.
Yet according to a survey from Savingforcollege.com, only 36% of parents suggest this as a gift idea and 39% don’t mention it all because they’re embarrassed or feel it’s awkward to ask for account contributions, despite the fact that the average college graduate earns $1 million more over a lifetime as compared to those earning only a high school diploma. So why wouldn’t you consider asking for contributions over a toy that breaks or loses its luster? Here’s what you need to know and how to get the conversation rolling.
Why a 529 Plan?
Although there are many ways to save for college, a 529 is a good investing option because the plan can be opened by anyone — parents, grandparents, other family members, friends — and contributions limits are higher than most other college savings plans. You can open a 529 Plan with as little as $250 and set up automatic contributions to the account — and increase contribution amounts anytime you want to. Annual after-tax contributions can be as much as $75,000 per individual or $150,000 per married couple. Annual contributions over $15,000 per individual and $30,000 per married couple fall under federal gift tax rules.1 The 529 plan invests in mutual funds or similar investments. And even small amounts can add up over time because of the power of compounding interest.
The good news about 529s is that earnings grow tax-deferred and withdrawals are tax-free as long as you use the money for qualified education expenses such as school fees, tuition, books, supplies, and room or board at most accredited colleges, graduate schools, community colleges or vocational schools. As of 2018, the qualified higher education expenses now includes up to $10,000 in annual expenses for tuition for enrollment or attendance at an elementary, secondary public, private or religious school. Keep in mind that for withdrawals used on anything else besides qualified education expenses, the earnings portion will be subject to both income tax and penalties.
Easy Ways for Gifting
Some 529 products provide easy gifting portals online so check to see if yours has one. Here are some other ways for your friends and family to contribute:
- The Gift of College is a gift registry for 529 plans and helping individuals pay down student loans.
- Checks can be written using the 529 account number.
Encourage Your Kids to Save
Many young adults fall into too much student loan debt because they are surprised about what college tuition actually costs and so they don’t plan accordingly for their future. For instance, average costs for tuition and fees is $10,560 for state residents at public colleges as compared to $37,650 for private colleges, according to the College Board. If you establish a 529, encourage your children to contribute to their own college savings when they are old enough to do so. Being good students can help in terms of getting scholarships, and many private schools offer discounted tuition or scholarships to offset high tuition rates. Because college costs vary significantly, decide what you can afford to contribute and what that breaks down to monthly, using an online college savings calculator.
Retirement First, Then College
When it comes to saving for retirement or college, experts agree that retirement comes first because there are no loans for retirement, but there are plenty of options to pay for college. Yet it doesn’t have to be an either/or scenario. A SchoolsFirst FCU financial advisor can help you explore both your retirement and college savings options and work with you to figure out how best to allocate your money.
Questions? We’re Here to Help
For more information about 529 college savings plans, please schedule an appointment with one of our financial advisors.
If you have investing questions, call 800.462.8328, ext. 4116, option 2, Monday through Friday, 9 a.m. – 5 p.m. or visit your local branch.
- Contribution limits for 2020.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Securities sold, and advisory services are offered through CUNA Brokerage Services Inc.(CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with SchoolsFirst FCU to make securities available to Members. Not NCUA/NCUSIF/FDIC insured, may lose value, no financial institution guarantee. Not a deposit of any financial institution.
CUNA Brokerage Services Inc. is a registered broker/dealer in all 50 states of the
United States of America. Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001, qualified distributions from a 529 college savings plan are tax-free.
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