April is #FinancialLiteracyMonth offering many reminders about the importance of saving. Thinking about starting a 529? Here's 5 reasons why the 529 makes an excellent option.
1. It’s cheaper to save than to borrow: It’s much more than “a dollar saved is a dollar earned” today, as many utilize student loans to cover the rising cost of higher education. Having to borrow becomes a much more costly endeavor long term, where savings is a more attractive option. For example, saving $100 per month averaging 4% rate of return compounded annually over 18 years would produce about $31,437. If borrowing $31,437 at 4%, a 10-year repayment schedule would require monthly payments of $318.28 for a total of $38,194.24 repaid. The $6,757.24 in interest costs may be a tax deduction in future years of repayment, but it’s clear that a little bit of early savings goes a long way to cover college costs.
2. No income limitations: Regardless of how low or high family income is, there are no income limitations associated with the 529 plan. This is unlike the Roth IRA, a retirement savings program that is only available for single people making less than $116,000 per year or married couples earning less than $183,000 per year as of 2015. Savers make saving a financial priority and are not limited by the 529 because of future gains on income.
3. Tax-free growth: Quite simply, 529’s offer a tremendous benefit of tax free growth. Specifically, all earnings grow free from federal taxes. Most states conform to the federal tax free treatment with 33 offering state tax deductions
4. Best savings option when considering financial aid: Families concerned their savings may affect their eligibility for need-based financial aid should take a look at the 529. Ultimately, the way cash is saved is what’s most important. On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at 5.64%. For example, $10,000 saved in a 529 could end up reducing financial aid eligibility by $564. However, this is much better than having money in a standard savings account in the student’s name, where it can be weighed against financial aid eligibility by 20%. The 529 provides a superior vehicle for college savings given financial aid regulations for higher education.
5. Great for estate planning: Grandparents are finding creative ways to help fund college for their grandkids while retaining control of their assets as part of their estate. Money put into a 529 is removed from the taxable estate, but grandparents are able to retain rights of control over the 529 account even when funding is typically used to cover future college expenses for their grandchildren. Generally, the goal of estate planning is to reduce tax liabilities and provide assets to family members as efficiently as possible. Under current tax law, you are permitted to gift up to $14,000 per year to another person for any reason without having to pay a gift tax or a generation-skipping tax (GST). This limit is sometimes referred to as the “annual exclusion amount.” With a 529 Plan, however, you are able to make a lump-sum contribution equal to five years of annual exclusion gifts to a beneficiary in a single year. This means that you can give up to $70,000 (if you are single) or $140,000 (as a married couple) at once, per beneficiary, without having to pay gift or estate taxes.