It is that time of year where high school graduates are preparing themselves for the next step in their academic career, college. The preparation for parents and grandparents undoubtedly started well before the summer after their senior year, especially when it comes to cost of tuition.
Parents and grandparents are often the first to help new children prepare for the high cost of college tuition by opening some sort of savings vehicle in their name. A popular choice as of late has been tax-advantaged state-run 529 plans. These savings plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Out of state, in-state or private colleges do not play a factor in starting a 529 or choosing a state’s plan. You are more than welcome to use any state’s 529 plan. In fact, 34 states currently offer residents a full or partial tax deduction or credit for plan contributions. The contributor can make their decisions based on tax credits, fees, asset allocation or historical performance, and these decisions are usually determined with the advice of the contributor’s financial advisor.
A 529 plan offers many other benefits any family member can appreciate: For one, they can be assured the money they are giving their children will be used for its intended purpose. To avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal savings in a 529 account must be spent on qualified education expenses such as:
-Tuition- Books and supplies- Technology Items- Room and Board
Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so they will grow tax-free as long as you use withdrawals for eligible college expenses, such as those listed above. If one child does not use up all the funds you have provided, you can change the beneficiary to another child without any tax implications.
These 529 plans are a great way for a guardian to help out their children manage the high costs associated with college. To learn more about these and more college savings opportunities, visit us at midwest-wealth.com or call us at 317-288-4989.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
An introduction to 529 plans. U.S. Securities and Exchange Commission.
Flynn, Kathryn. Eight Reasons why Grandparents love 529 plans.savingforcollege.com. 16, July.2015
Name the top 7 benefits of 529 plans. savingforcollege.com
What can often be the most frustrating part of my job and ironically the area investors enjoy discussing most, is the spontaneous and ongoing geopolitical events that surround the underlying economic data. It is not to say they are not important, but they often make for better news headlines and can cloud the fundamentals at which a strong or weak economy is graded on.
Situations I am closely watching at this point include:
- U.S. debt ceiling debate- Italian national election- North Korea situation- Pending trade deals with the G-20 nations
The biggest risk, at this point, appears to be the debt ceiling. This will require action by late summer, most likely. Should Democrats and Republicans be unable to agree, it could rattle financial markets. In the abstract, it’s hard to see what the problem is. All of the borrowing is to pay for spending specifically authorized by Congress itself. Not raising the debt limit is equivalent to whipping out the credit card and then not paying the bill when it comes due. This has not stopped the debt ceiling from becoming a perennial problem, however.
Part of me says this time will be the same as last time. We will see both sides pushing to get maximal concessions on their priorities, trying hard to use the risk of not raising the limit to force agreement on their terms.
Even if we do get a debt ceiling face-off, or any of the other potential issues, known or unknown, the underlying strength of the economy is likely to limit the damage. We have seen many situations in the not-so-distant past that were equally as scary and they didn’t knock the economy or markets off their path.
The biggest risk, given that strength, is that the expansion cycle has been much longer than usual, and the supporting trends are starting to decay. Still, based on history and current conditions, growth is likely to last through the end of the year.
While the risks are real, then, and growth will not last forever, the rest of 2017 looks likely to bring more of the same. More economic growth, slow but steady; more market appreciation, ditto; and more normalization across the board. After the turmoil in recent months and years, this is not a bad place to be.