College Planning Playbook – How To Save For Your Child’s Dream College

Buzzer Beaters, breathtaking plays and Cinderella stories make March Madness one of the most exciting events in all of sports. The multi-week tournament is a fantastic display of pageantry and school spirit for many of the prestigious universities competing. As you watch the madness unfold you may wonder to yourself: “what are the best ways to plan for my child to attend their dream university?” While there are many different strategies to help plan for college, the 529 College Savings Plan is one of the most popular and effective options available to achieve this goal.

Use a 529 College Savings Plan To Get Them Into The Best Colleges  

529 College Savings Plans are tax advantaged accounts that offer tax free gains on amounts contributed to and invested within the accounts. This benefit is very powerful and helps ensure that all the returns you earn on investments for your child’s college go towards that goal and not towards paying taxes on these gains.

These benefits become more valuable the earlier you open and begin contributing to these accounts. A 529 account that is opened shortly after a child’s birth and contributed to for 18 years will have more gains upon distribution due to compound interest and time in the market than an account opened at age 8.

In order to qualify for this favorable tax treatment, however, funds need to be used towards approved higher education expenses. In addition to tuition this can include room, board and supplies. Funds distributed for non-education expenses are subject to ordinary income tax with an additional 10% penalty on the gains.

Advanced 529 College Savings Plan Strategies When Saving For Your Kid’s College Education

Despite the penalty, 529 College Savings plans have many flexible provisions that allow families to optimize these accounts and potentially reduce/eliminate any future potential liability. Depending on your goals and family situation you may want to implement one or several of these strategies to get the most out of the 529 accounts.

Front Loading Or Adding Money Early To Speed Up College Saving Progress:

Annual contributions help build balances over time and are an excellent way to work towards funding college expenses. In situations where capital is available, the practice of front loading a 529 account earlier on will help jumpstart account value and provide more tax free gains before beneficiary uses funds for college. Current front loading contribution limits allow for up to 5 years of joint annual gift exclusion ($17K/year each) towards a beneficiaries account ($170K total).

Private Primary School

In addition to tax benefits for funds used for college expenses, proceeds from 529 accounts may also be used to help pay up to $10K/year of private primary school expenses. For families who plan on paying for private school this may incentivize higher contribution amounts earlier on so that there enough funds to address both private high school and college expenses. 

Opening Account in Your Own Name For Your Unborn Child

529’s are typically opened in the name of the beneficiary after their birth. For families that are planning to have children in the near future but do not have children yet, you are allowed to open a 529 account in your own name now, fund the account immediately, participate in any potential market growth on these investments and then finally transfer the entire account value to your beneficiary upon their birth. This allows for additional time in the market and the compounding benefits that come along with it for eventual college expenses.

Roth Conversions

For many years, fear of overfunding an account and having leftover funds that would be subject to a penalty deterred families from aggressively contributing to 529 accounts. Recent legislation passed through SECURE Act 2.0 in Dec 2022 help address these concerns. Under the new legislation, unused funds from a 529 may be converted into a Roth IRA for the 529 beneficiary if account has been open more than 15 years. Annual conversion amounts are subject to annual Roth IRA account contribution limits. This change now allows families to contribute more to a 529 if desired, knowing that any unused funds will go towards helping children build a retirement nest egg early on if not used for college expenses.

A 529 College Savings Account Can Be Used For International Use:

529 College Savings accounts were created with American Universities in mind, though the acceptance of the program has expanded to many international universities as well. Many prestigious universities in North America, Europe and beyond accept 529 funds and honor the tax advantaged nature of the funds.

Beneficiary Transfer

One of the flexibilities offered by 529 College Savings plan is the ability to transfer funds between same generation beneficiaries without penalty. Funds can be moved across accounts for siblings within the same nuclear family or extended family relatives if desired very easily. This allows parents to view total 529 values for children as one large pot of college savings money. If one student ends up not needing the fund, account balances can be transferred to a sibling to address their college expenses very easily.

College Savings Account Opening and Execution

529 College Savings plans are sponsored by a specific state (WA State 529 College Savings Plan is DreamAhead 529). You can open a 529 Plan through any state sponsored program to receive the tax benefits. You are not restricted to your current state of residence or where the attended university is domiciled. If the state sponsored plan is the state in which the attended university is located there may be additional benefits offered, though these benefits vary from state to state.

Many large investment firms and custodians (Charles Schwab, Fidelity, Vanguard, etc.) offer 529 College Savings plans through their platforms. That may be a comfortable starting point to explore the accounts and options for each plan. 

Investment options for each plan will vary, though every plan will offer a mix of index funds, mutual funds and target date funds with exposure to stocks and bonds to meet the investors risk tolerance for the account. The right investment allocation for an account will depend on how many years the student has until they will attend college.

Conclusion

The 529 College Savings plan is a fantastic option for families planning for future education expenses. These accounts offer tax advantages and many flexible applications to meet a wide range of needs and circumstances. If you have any questions about how 529 College Savings accounts could be used for your education plannings goals and how to integrate into your overall financial plan, please feel free to reach out to our team of financial advisors and we would be happy to assist.