Question: I’m a parent and want to begin saving for my children’s college tuition. What tips can you share with me?
A: Saving for college is a common goal for many American parents. Earlier this year, changes were made to the child tax credit program for 2021, enacted through the American Rescue Plan Act, increasing the tax credit amount and qualifying child age limit. With many Americans receiving a higher child tax credit, it’s a great time to consider a practical use for the additional funds, and a 529 College Savings Plan might be a smart choice.
What is a 529 Plan? 529 College Saving Plans, or “qualified tuition plans,” are similar to qualified retirement plans in that money can grow in an account free from Federal income taxes. Even better than most retirement plans, qualifying distributions from the plans are not subject to income tax. To qualify for the tax-free treatment, 529 funds withdrawn must be used toward eligible education expenses, like college tuition, K-12 tuition, and student loan repayments. Contributions to the plan are considered gifts for tax purposes and follow gift tax exclusions and rules.
How can the funds be used? Approved use of 529 funds may differ slightly from plan to plan, depending on the rules of the plan sponsor. Parents are currently allowed to withdraw up to $10,000 a year per student to spend on tuition for K-12 grades. You can also withdraw tax-free for college expenses, including:
- College books and supplies College computer and internet access
- College room and board (if the student is enrolled at least half-time)
- Student loans (with a lifetime limit of $10,000)
529 Plans May Differ by State. Most every state has at least one 529 plan available, but you’re not limited to using your. state’s specific 529 plan. 529 plans differ: some are education savings plans, and others are prepaid tuition plans, so it’s important to speak with a trusted financial advisor to determine which plan is right for you. Certain states even offer state-level income tax deductions or state-level tax credits for 529 plan contributions, making 529 plans even more desirable. For example, Ohio allows residents a $4,000 per year, per beneficiary deduction for contributions to its plan. Indiana provides a 20 percent tax credit, limited to $1,000, for contributions to its plan.
Be Aware of 529 Fees. When choosing a 529 plan, pay special attention to fees and expenses as unexpected costs could reduce your savings and diminish returns. Consider asking your financial advisor for a breakdown of 529 plans that may be right for your situation, including all fee estimates and discuss your options in detail. Sometimes, a high fee plan may also allow the highest return and could be a better option than a low fee, low return plan.
Special Needs Options. If you have a child with special needs, you’ll be happy to learn that 529 plans can also be used toward special needs equipment and services incurred in connection with college or university enrollment or attendance.
529 college savings accounts may also roll up to $15,000 into a 529 ABLE account—an account designed for individuals with disabilities and their families, providing a way to save money for disability-related expenses.
Saving for college can prove challenging, but there are options available for parents to pay for college and other educational expenses, free from federal taxes. A 529 plan is just one option available. Speak with a trusted CPA or financial advisor to learn more about options that might be right for your situation.
Crystal Faulkner is a Cincinnati market leader with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. Tom Cooney is with Wealth Dimensions, an investment advisory firm. For additional information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that profiles highly successful people, companies, organizations and issues throughout our region.