by John Foran
Saving for College Amid COVID-19: Is My Money Safe?
COVID-19 may have changed what going to college looks like these days, but that doesn’t mean that your college savings plan should.
Whether back in class or taking virtual courses this fall, the cost of tuition is still on the rise. Saving for children’s education is a top priority among parents and a common concern for many of our clients. At Foran Financial Group, we help parents develop a plan designed to cover these costs while still working toward the retirement goals they’ve set forth. While we often get questions about saving for these expenses, these days, there are new concerns.
- How does the pandemic affect my long-term savings goals for my kids’ higher education costs?
- Is this money safe?
- What should I be doing?
In short, if you are able to continue contributing to your children’s college savings as you have been, you should. If you need to decrease the amount you’re saving for college, that’s understandable. If you have to put a temporary hiatus on making contributions, that’s OK too; just don’t forget to begin contributing again when you can.
Because a 529 plan is a common vehicle to save for college tuition and keep the money away from taxes and other spending, below is a quick breakdown.
What is a 529 Plan?
A 529 plan is a savings account with special tax advantages designed to be used for education expenses. Anyone can open a 529 account, and anyone can be a beneficiary, no matter how old they are. The account owner controls the account and the funds until the money is withdrawn by the beneficiary. Withdrawals can be taken at any time, but the funds must be used for qualified educational expenses, otherwise federal income taxes and a 10 percent penalty will be added, as well as possibly state and local taxes.
The name “529 plan” comes from the section of federal tax code that outlines them. They’re administered in all 50 states, as well as the District of Columbia. Deposits into a 529 account grow on a tax-deferred basis, and there are no annual limits to how much you can contribute to an account.
In the past, you couldn’t use funds from a 529 account for much more than higher education expenses of the designated student, without triggering taxes and penalties. But the plan requirements have recently been modified, and as a result, 529 accounts have become a lot more flexible.
For example, 529 funds can now be used to pay tuition for trade schools or vocational and technical programs. Also, if a child’s college plans change and he or she doesn’t use some or all of the funds in the 529 account, the remaining funds can be designated to another child.
You may also be able to use the money from a 529 account for K-12 education, student loans, apprenticeship programs and other qualified educational expenses.
Any “non-qualified distribution” is subject to federal income tax and a 10 percent penalty, so non-school related withdrawals from a 529 account should be a last-resort solution. Discuss your situation with a financial advisor to see if taking from a 529 account is absolutely necessary.
General Tips for Saving for College
College is expensive. In fact, it’s probably one of the biggest expenses you’ll ever incur, second only to buying a house. In 2018, the average cost of one year of college ranged from $17,797 to $46,041. Multiply that by at least four years, and then double or triple (and so on) depending on the number of kids you have, and those numbers can be staggering. But with time and planning, anyone can save enough to at least offset some of the costs of sending a child to college. The trick is to have a plan and start saving early.
If you don’t have a solid retirement plan or if you have a lot of consumer debt, talk with a financial advisor about these issues first. Remember, you can borrow money to pay for college, but you can’t borrow money to pay for retirement.
One strategy some families use is asking friends and family to make contributions to a 529 account instead of giving physical gifts for birthdays and holidays. (As an added parental bonus, when you’re able to deposit these gifts into the 529 plan, you may be able to reduce your state income tax burden!)
If you want to pay for your child’s entire college education, start early. The earlier you start putting money aside, the less that amount will be on a monthly basis.
For example, say you start saving $400 a month when your child is born. If you wanted to have the same total amount saved when your child is 18 but don’t start until your child turns 6, your monthly amount will be closer to $900 a month. If you wait until your child is 12, your monthly savings would need to be close to $2,000 a month.
While tuition (and books, and room and board) is expensive, don’t let yourself be so overwhelmed by the costs of college. Remember, saving something is better than saving nothing, and 529 investment accounts have the potential to compound your investment, no matter how meager.
If you have questions, need help setting up a 529 account or aren’t sure where to start, contact Foran Financial Group and get the conversation started.
The financial professionals associated with Foran Financial Group may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.