Singletary: 529 plans make sense for college savings
By Michelle Singletary
Published: October 10, 2018, 6:02am
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The 2019-2020 Free Application for Federal Student Aid (FAFSA) is now available, allowing students and their parents to fill out the form they hope will lead to money to pay for college. In most cases, the aid won’t come close to covering the cost of four years of tuition, fees, room and board.
It’s still worth it to submit the FAFSA form, butfamilies have to do more. Just take in the magnitude of this number: $1.53 trillion dollars.
That’s how much there was in outstanding student loans for the second quarter of 2018, according to the Federal Reserve.
So, if you’re financially able, filling the gap between federal need-based aid and scholarships will have to come from savings. And one way to do this is to put money in a 529 college-savings plan.
Under a 529, earnings are not subject to federal tax — and generally state tax — if they are used for such qualified education expenses as tuition, fees, books, and room and board.
Two years ago, the most popular way to save for college was a regular savings account, according to a survey by T. Rowe Price. Now 44 percent of parents surveyed by the financial company said they are using a 529 account in 2018, moving it to the top way to save for college. Total investments in this savings vehicle reached a record $328.9 billion in the first six months of 2018, according to the nonprofit College Savings Plans Network (CSPN). The average account balance hit a high of $24,153.
In 1999, Joseph Hurley was working as a tax CPA in Rochester, N.Y. The law authorizing 529 plans was just a few years old. Hurley and his wife, Ginny, opened 529 accounts in 34 states for their two children. It was their way of researching how they worked. Their research led to a website — savingforcollege.com — and a self-published book about the plans. The 12th edition of the book is now out.
For this month’s Color of Money Book Club, I’m recommending “Savingforcollege.com’s Complete Guide to 529 Plans” by Hurley, Kathyrn Flynn and Matthew Toner.
At the start, the authors make an excellent case for why a 529 plan makes sense. Here’s why:
• Everyone can participate without regard to age or income.
• Account holders can accumulate a great deal of money in the account — hundreds of thousands of dollars depending on state limits.
• Parents don’t have to give up control of the money.
• Many states offer tax deductions for residents who make contributions to a 529.
• As of 2018, the Tax Cuts and Jobs Act allows up to $10,000 in annual qualified expenses for tuition at an elementary or secondary public, private, or religious school.
“No other tax-advantaged program provides the combination of benefits 529 plans offer,” the authors write.
You don’t have to read this book straight through. Pick you points of interest. For example, if you have a disabled child, you need to read the chapter on 529 ABLE accounts. To qualify for public assistance, families couldn’t save much money. But the Achieving a Better Life Experience (ABLE) Act of 2014 allowed states to create a tax-advantaged savings program for eligible people with disabilities.
There are so many myths about 529 plans, and the authors debunk them: No, your child is not limited to an in-state school; and, no, money in a 529 plan does not significantly impact a student’s eligibility for federal financial aid.
Invest some time in learning how a 529 plan works. It’s well worth your effort.
I’m hosting an online discussion about 529 plans at noon Eastern time on Oct. 25. My guest will be Mark Kantrowitz, publisher and vice president for Savingforcollege.com.
