By Joanna Swanson
I have always loved the feeling of summer. Once Memorial Day celebrations kick off, the atmosphere seems to relax. Sunshine, water and sunscreen become our main concerns. Long, warm nights are filled with the sounds of lawn mowers and children laughing.
Summer is the epitome of fun once you start elementary school. My son finished kindergarten this year and is already proclaiming, “Summer is the best time of the year!” There is something freeing about leaving hard seats and lunch lines behind for swimming pools and Slip ‘N Slides.
Time starts really flying once they’re in elementary school. It seems like only minutes ago they were the precious baby you were trying to get to sleep through the night or the toddler that you were trying to negotiate potty training with. Now they are 6 or 7 years old, reading books to you and talking about what they want to be when they grow up.
If you’re like me, the question of “who’s going to pay for all this?” comes to mind while the kids are daydreaming. The 529 college savings plan is part of the answer, so let’s look at how that fits into the financial planning journey.
When I Grow Up…
Inevitably, the “what I want to be” conversation lends itself to the college conversation. Before you know it, your summer chats over popsicles with your sweet kindergartener about the expectations of first grade are conversations with your high school senior about what to expect their freshman year in college.
So, as you enjoy this summer and reflect on how your child grew during the last school year, also start to reflect on your expectations for them after they finish high school. We don’t know if our kindergartner who wants to be a scientist will decide to tackle medical school, but it’s a planning conversation that a family should have.
What hopes do you have for your child? What dreams do you have for them? Are you steadfast in a desire that they will attend a four-year university after high school? Does your family strongly believe in state universities, or does your family have a tradition of attending a private university?
Do you believe the first few years of post-high school education should be attained at a community college given the reduced cost? Or, just as importantly, maybe you are noticing your child has the “fix-it” gene and you see them attending a trade school. Possibly they have picked up a paintbrush and you are amazed at what your kindergartner can create. Is art school in their future?
The 529 Plan
Whatever you believe the post-high school future holds for your child, saving for that future is important. Every family has a different budget and different education expectations. Having a family conversation about how you are going to pay for these education expectations is important. Like all long-term savings goals, the sooner you start saving, the more time your money has to work for you.
If you know you want to save but not sure where to start, here’s a great resource. It answers your questions about how college savings plans work, why you should use a college savings plan, and which one is best for you.
A 529 College Savings Plan is a great way to save for post-high school education expenses. I use the term “post-high school education expenses” instead of just “colleges savings”, because not only can 529 Plans can be used for 4-year universities, but they can also be used to attend trade school, beauty school, art school, culinary school, or a community college. They can basically be used to achieve whatever dream your little kindergartner wants to turn into their grown-up reality.
So How do College Savings Plans Work?
First, you need to decide which plan is best for your family. If you live in a state where your 529 contributions will provide you with a state income tax deduction, usually investing in your state’s 529 college savings plan is the best option.
Second, once you’re done choosing a 529 College Savings Plan, you need to decide who is going to be listed as the owner. 529 Plans can only have one owner listed. If you’re married, I always recommend the spouse who manages the family finances be the owner and the other spouse as the Successor Account Owner.
One great benefit of choosing a 529 College Savings Plan is that anyone can own an account. Parents, grandparents, aunts, uncles or a best friend next door can all open an account and save for post high school education expenses. You can even open an account for yourself.
Next, you need to decide how much to contribute and how often. In order for your contributions to be claimed on your state taxes, they must be made by December 31. You can make your contributions per paycheck, monthly, quarterly or one yearly lump sum. Whatever works best for you and your family.
I also recommend reviewing the 529 Plan of your choice to determine if there are contribution minimums. Most plans do not have minimums, and often you can contribute as little as $25 per month.
How Much Can I Contribute to a College Savings Plan?
If the plan you choose does not have a minimum, then you decide on the contribution amount that makes sense for your family. If you want to set a contribution amount to reach a particular savings goal, I recommend starting with a college savings calculator. This calculator allows you to choose what type of education you are saving for and input any educational savings dollars you wish based on the age of the child.
529 Plan contribution limits follow annual the gift tax exclusion and 5-year gift-tax averaging rules. Therefore, contributions of $15,000 per beneficiary ($30,000 for a couple giving jointly) can be made per year. However, if the contributor elects to use 5-year gift-tax averaging, the limits are $75,000 per beneficiary for a single contributor and $150,000 per beneficiary for a couple giving together.
Also, each state sets its own aggregate contribution limit, based on the cost of a college education in the state. Please review your state’s 529 Plan for their specific contribution limit.
How Do Contributions Work?
Contributions are after-tax dollars and they grow tax-free. Distributions will not be taxed upon withdrawal as long as the money is taken out to pay for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, room and board (if the student is enrolled at least half time), computers and internet access.
As you can see, 529 College Savings Plans are flexible and can be used for education savings goals of almost all families. The biggest step you can take is to start saving. Next time you and your child are sitting on the porch enjoying popsicles and they turn to you and say, “I want to be a scientist zombie chaser when I grow up!” You can say, “Great! I am already saving for that dream!”