Saving for your child’s college education is a stressful undertaking, and many parents don’t know where to begin. A 529 savings account is the first step for many families looking to save money for their children’s college educations. There are important considerations to be made before beginning any investment program for college funds, as the amount of money in certain accounts can affect the level of financial aid for which your family will be eligible. There are many complexities inherent in saving for college, and it is wise to have a strategy in place prior to any disbursement of funds.
The American Opportunity tax benefit applies to $4,000 in college tuition and expenses that every family is eligible for through their income tax return. Be sure to take advantage of this tax credit before you disburse any personal funds. There are also income limits in place for this tax credit so be sure you fully understand it as part of your overall college savings strategy. Once you have utilized this tax credit to its full potential, you can then look to your 529 savings account to help defray the costs for tuition and expenses.
Grandparents and other relatives are allowed to hold 529 accounts that will not have an impact on the calculation for the student’s financial aid eligibility. If you are likely to be eligible to receive financial aid, this is a smart, and fully above-board, move to make. Be aware, that if your child attends a private school, all funds available to the student, regardless of who holds the account, will need to be disclosed. Once the student begins taking disbursements from the account, this money will count as income.
When selecting the most appropriate 529 savings plan, do not forget to factor in fees. Between the state-offered plan that you enroll in directly with the state, and those provided by financial firms and advisors, the state-sponsored plans will have lower fees and cost less overall. Grandparents can also contribute to the accounts via the Gift Tax Exclusion which avoids all taxes and keeps the principal amount as large as possible for the student’s use.
Be sure to only withdraw the amount that you need. Consider all grants, scholarships, and tax credits when determining the appropriate withdrawal amount. Many parents are too hasty and withdraw the entire amount of the tuition bill without considering these other factors. Also be aware of what are qualified and unqualified expenses. The use of 529 account funds for the latter can result in taxes and penalties.
While 529 college savings accounts are an effective way to minimize taxes while saving for college, there are many nuances to these accounts that you will need to understand prior to disbursing any funds. Your financial advisor will be able to guide you through the process and inform you of the best practices to maximize the amount of money that you have available for your children’s secondary education.