College Savings Accounts: Educating the Parents Goes a Long Way

Laurie Dubchansky Personal Finance 0 Comments

A “529 plan” is an education savings plan account designed by the federal government to help families set aside funds for future college costs.  The plan is named after Section 529 of the Internal Revenue Code, which created these plans in 1996.  While your deposits are invested, any earnings and growth are not subject to income tax, as long as withdrawals are for allowable education expenses.  This is very difficult from a regular savings account, where all income is taxable, and you receive a 1099 form at year-end showing all earnings.  The 529 plan tax-free earnings are a big advantage.  This means, a family can begin to save for college as soon as they think about it, or even when their child is born!

Once the account is set-up, how much should one set aside for college savings?   Other priorities are more important, such as living expenses, an emergency fund and retirement savings.  No one else funds your retirement, and there are some other resources to cover college expenses.  Those resources include grants, scholarships, loans and school based financial aid.  Even part-time work during college can help with living expenses.  However, if you have some funds left at month-end, and your higher priorities are met, consider an education account.

If you believe your child is destined for post-secondary education, you set-up an account with that child as the beneficiary, i.e. the one who receives the money.  However, all payments for college should be made directly to the college to avoid any confusion on how the funds were used.  Each account has web access and you actually direct funds to the school where the child is enrolled.  If that child decides to pursue other opportunities, you can change the beneficiary to another family member.

Family Participation: in my family, I have a niece with one child and she is expecting her second child this month!  Upon my recommendation, her father set up a 529 account a few months ago.  Now, while considering holiday gifts, I choose something small for under the tree, and I write a check to their education account.  I enjoy participating in college savings for my grand-nephew.  With my counsel, my brother-in-law opened a Utah Educational Savings Plan account (see uesp.org).  This is a top-rated plan, with plenty of investment options, all at low-cost.  For Morningstar’s thorough review of education plans, see this link: Morningstar 529 review.

If a grandparent sets-up the account, share the account number with family members, so that gifts can be made to the account.  I perused the uesp.org site and found coupons I could fill in and insert into their holiday card, and I mailed the check directly to the plan.  The child’s great-grandmother made a gift this very same way!

One aspect of a grandparent setting up the account is that it often done without the involvement of the parents.  As a Certified Financial Planner™ and also an advocate for parental responsibility, I believe parents should be involved.  Their child is the beneficiary of the savings account!   This is a great opportunity for the parents to learn about education savings!

If you are the parent or the grandparent of a child, start a 529 education savings account, and make sure the parents know where the account is, how it is invested and how and when it should be used.  If you have questions or need assistance, please contact Havaplan Financial.

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