Financial Idea's Blog

What Does A College Plan Do For Me?

Well, it does lots of things – so where do we start? OK, before the first thing , let’s point out that anyone can contribute to it. That is, you can be our future student’s mom and dad, or grandma and grandpa, or godparents, or just family friends wanting to give a shower gift.
That aside, what it does for everyone involved is make it possible to have enough money for post-secondary education, which goes up at a rate of about 7% every year, double the amount of normal inflation.
This happens as a result of putting together a plan well before the last minute to ensure that your goals can happen. I can’t tell you how many people in my neighborhood are pushing baby carriages with the attitude that they don’t have to worry about that for a long time. Technically, they don’t, but I guarantee it will be a lot more expensive later than it is now. Personally, I’d rather see my clients making realistic choices based on their incomes and lifestyles now, with plenty of time to make adjustments as necessary later, and that means putting together a plan that picks out a price range for various colleges, forecasts the future cost, and lets you know how much you’d need per month, per year or as a single lump sum in order to reach that goal.
Only that way can you know if it’s realistic to want to pay for four years, all expenses, or if your child is going to have to live at home, or some other variant, like you pay for the first two years and they pay for the last two or they go to junior college for the first two years and then transfer to a major university. All of those are valid family value approaches – you just need to know as early as possible what’s possible given your situation.
After that, we can get into the various benefits that a 529 plan offers beyond just having any money at all for the purposes of school.
So, most people ask me at this point, “Is this good for any school?” Or do I have to choose one now? Good news – the program does NOT make you pick a school ahead of time. In fact, there’s not even a requirement that your student go to a four-year university! You can use 529 funds at any institution which accepts U.S. Federal Financial Aid. That includes trade schools and special purpose schools, like cooking school or golf school or a school for private pilots. It also includes some 500 or more universities OUTSIDE the United States.
The only word of caution there is: don’t model your plan based on a junior college somewhere if you’re certain your child is Harvard material. It won’t work.
Another question people have includes, “What about scholarships?” More good news! If your child gets an academic or athletic scholarship which means that you’ve saved too much in the 529, you get to withdraw an amount matching the scholarship to be used for some other purpose, without penalty.
Yet another question is: “What if there’s money left over when they graduate?” Well, there’s a few answers to that. The first is that it doesn’t belong to them in the first place – the way this plan is structured, they are your beneficiary instead and you are granting the money to them to pay college expenses. So, if they have younger siblings, those younger ones can become the new beneficiary. Or, if they want to go past the bachelor’s level to one or more graduate programs, the remaining money can be used there, up to 30 years after high school graduation.
Failing that, you could make yourself the beneficiary and use the remaining funds to pay for adult continuing education later in life. Finally, the worst case, you could just take it out and not use it for education at all, but the IRS will charge you a 10% penalty on that amount. Maybe that’s a big deal that you want to avoid, and maybe it’s not – that’s a case-by-case situation.
Next to last, you don’t have to be a resident of the state where the plan is based in order to participate. For example, the state of Virginia plan is hosted by American Funds, the state of West Virginia by Hartford Funds, Ohio by Blackrock funds, Oregon by MFS funds, Arizona by Fidelity, etc. The only reason to pick a plan from your home state is in the cases where you get a state income tax break for doing so. Not all states offer this, and if you live in one of the states that has no income tax, then it doesn’t matter anyway.
And, last but not least, the VERY BEST PART about 529 plans: if you’ve stayed with this article so far, they are FEDERALLY TAX FREE. That’s right, you start putting money away now, while baby is 1 year old, and it grows until they need it at 18 or 19. All of that growth will never be taxed. Now that’s a sweet deal!
Want to know more? Let’s talk, and create a plan that’s right for you and your family.

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