Plan ahead for the places they'll go...

College costs continue to rise, yet having a degree is more important than ever. Studies show that those with college degrees earn 74% more than high school graduates and experience higher job satisfaction and lower unemployment.  Regular economic inflation is about 3% on average (currently 1.2%), while Education Inflation is 8.6% on average annually in CA through the 2018/19 school year. https://www.cnbc.com/2019/12/13/cost-of-college-increased-by-more-than-25percent-in-the-last-10-years.html. A steady investing strategy can make a difference in your child's future.  If you have generous relatives, that helps.  If you do not, we can still find a way to get you to your goals.  Ask me to run a college calculation for your child based on assumptions unique to the school you hope they get into, or by using a national average.

The annual cost for 2020-2021 National Average Public College is $25,487 tuition and living expenses.

What is a 529 Savings Plan and do we have to spend it on college?

Named after Section 529 of the Internal Revenue Code, 529 savings plans provide a tax-advantaged way to save for qualified education expenses. All of the interest earned in a 529 is exempt from Federal Taxation as long as the funds are spent on education.  The laws were changed in 2018 to show that K-12 education expenses may also be federally tax free distributions. California currently does not allow for state tax avoidance on distributions. California currently does allow for distributions for K-12 expenses, however - the state may apply a 2.5% penalty on K-12 distributions while if withdrawn to cover higher education expenses, there is no such penalty, just state taxes for your effective rate. Anyone may contribute to the 529 plan for your child, so these accounts make Grandparent gifting easy.  If your child gets a scholarship, the penalty is waived for any funds not used for education or 529’s can always be transferred to another child, or back to the parents for their higher education expense coverage.

529’s can be invested in mutual funds only. The asset is never owned by the child, always controlled by the parent and an asset of the parent’s. It counts less against FAFSA than the following option, but the limitation herein is that funds need to go to higher education (or caveats mentioned) or withdrawals will be penalized by your state and the IRS.

What are my other options that don’t require me to spend it on college?

We can also open a UGMA/UTMA account for your child(ren). This is a Uniform Gift/ Trust Minor Account, and it can hold individual stocks and bonds as well as mutual funds and other investments. The focus of the account is to spend it on the betterment or enrichment of the child’s life. This has some tax advantages as well. Once your child turns 18, he or she will become the official owner. The benefits here are many. If your child files their own tax return and their total income is less than $44,000 they don’t pay taxes on long term capital gains. So if you bought Apple stock for Johnny when he was 10 and spent $2,000 to buy in however that position is now worth $10,000? As long as Johnny’s total income from stock sales and jobs do not exceed $44,000 long term capital gains tax on that $8,000 gain is at 0%. This income limit is sure to change, but this is the current law for 2023 IRS rules. So this is another creative method to pay for college perhaps - or for anything you and your child choose to spend it on. The entire account balance will be counted on FAFSA as an asset of the child. You could wait and transfer it to the child after they begin college, however FAFSA always goes two years back, so it will eventually catch up to you. From my experience, the gift FAFSA would have given you if this account didn’t exist doesn’t usually exceed the “gift” or tax savings of having the account.

A creative way to work with accounts like this is to have the parents / grandparents / anyone willing gift securities to this account over the child’s life. The current maximum is $17,000 per giftor - so if both parnets /grandparents do this, that could be $34,000 annually. This limit will change as well, current for 2023. The child will inherit the cost basis from the giftors (amount they paid for the stock) however, using the creative tax strategy above, there still may be a huge tax incentive.

And lastly, this type of account establishment starts your child off in life with a little more financial literacy, one of my favorite pursuits. My goal and hope is that they will carry this through their life, always with an understanding that they create and build wealth by investing.

Disclosures & Taxation

Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other education expenses or that a beneficiary will be admitted to or permitted to continue to attend an educational institution.  Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals.  

An investor should consider, before investing, whether the investor's or designated beneficiary’s home state offers any favorable state tax treatment or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program.   Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. Furthermore, the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 allows for up to $10,000 a year per beneficiary in tax free distributions from a 529 Plan if used for tuition incurred for enrollment or attendance at a public, private, or religious elementary or secondary school. Check with your state’s guidelines prior to withdrawing the funds.

For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.