The month of August is a flurry of activity as families ready themselves for another school year.  Back-to-school shopping trips, school registrations, and open houses fill many household calendars leading up to that memorable first day of school.  Even though it may seem years away, remember that it’s never too early to start planning for college.  One of the most common vehicles for saving is a 529 college savings plan.  Here are a few reasons why 529 plans are so popular.

Tax Advantaged
529 college savings plans are flexible accounts designed specifically for educational savings.  The earnings on your contributions grow tax-free as long as the withdrawals are used for qualified education expenses such as tuition, fees, books, and room and board.  The tax law also broadened the definition of qualified education expense to now include primary and secondary tuition, up to $10,000 per year, per student.  Another benefit is the ability to deduct contributions from your state taxes.  In Missouri, the maximum deduction is $16,000 per year if married filing jointly or $8,000 per person if single.  This is a maximum household deduction across all 529 account contributions for the year.

Each account is owned by an adult, often a parent or grandparent.  The child for whom the account is established is the beneficiary.  The account owner controls how the money is invested as well as the timing of the distributions.  This ensures that the student, or beneficiary, does not have access to the funds in the account to spend on things other than education expenses.

A big concern parents share is overfunding a 529 college savings account.  Maybe your child will go into the military or maybe receive a full scholarship to the college of their dreams.  If a scenario plays out where you never need the money in the 529 plan for education expenses, there are a few options.  First, you can change the beneficiary to another child or family member who does need help paying for their education.  Some clients simply move the remaining account balance after one child graduates to the next one down the line.  There is never a penalty for leaving leftover funds in a plan or for moving to another beneficiary.  Or, you can take a non-qualified distribution.  If you choose the non-qualified distribution, you will be subject to income tax and 10% penalty, but only on the earnings.  Your contribution portion of the account will never be penalized since it was made with after-tax dollars.

Start planning early for your children’s education expenses.  Establish your goals for how much you wish to save and make regular contributions.  Even if you wait until middle school or high school, any savings you make will help reduce the impact of student loans down the road.  For help with college planning, call Hovis & Associates to schedule a meeting.  We can help project how much college expenses will be as well as how much you should save to reach your college funding goals.

Important Disclosures:  Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information are contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state’s 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.